UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
For
the quarterly period ended September 30, 2008
or
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
For
the transition period from _________ to_________
Commission
file number: 1-16095
Aetna
Inc.
(Exact
name of registrant as specified in its charter)
Pennsylvania
(State
or other jurisdiction of incorporation or organization)
|
23-2229683
(I.R.S.
Employer Identification No.)
|
151
Farmington Avenue, Hartford, CT
(Address
of principal executive offices)
|
06156
(Zip
Code)
|
Registrant’s
telephone number, including area code
|
(860)
273-0123
|
Former
name, former address and former fiscal year, if changed since last
report:
N/A
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter
|
period
that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. þ Yes ¨ No
|
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer þ
|
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (Do not check if a
smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨ Yes þ No
There
were 461.1 million shares of the registrant’s voting common stock with a par
value of $.01 per share outstanding at September 30, 2008.
Aetna
Inc.
Form
10-Q
For
the Quarterly Period Ended September 30, 2008
Unless
the context otherwise requires, references to the terms “we,” “our” or “us” used
throughout this Quarterly Report on Form 10-Q (except the Report of Independent
Registered Public Accounting Firm on page 22), refer to Aetna Inc. (a
Pennsylvania corporation) (“Aetna”) and its subsidiaries (collectively, the
“Company”).
Part
I
|
Financial
Information
|
|
|
|
|
Item
1.
|
Financial
Statements
|
1
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
38
|
Item
4.
|
Controls
and Procedures
|
38
|
|
|
|
Part
II
|
Other
Information
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
39
|
Item
1A.
|
Risk
Factors
|
39
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
39
|
Item
6.
|
Exhibits
|
40
|
|
|
|
Signatures
|
|
41
|
Index
to Exhibits
|
|
42
|
Part
I
|
Financial
Information
|
Item
1.
|
Financial
Statements
|
Consolidated
Statements of Income
(Unaudited)
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
(Millions,
except per common share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
care premiums
|
|
$ |
6,450.8 |
|
|
$ |
5,445.4 |
|
|
$ |
18,993.2 |
|
|
$ |
15,916.7 |
|
Other
premiums
|
|
|
466.7 |
|
|
|
494.5 |
|
|
|
1,415.2 |
|
|
|
1,493.1 |
|
Fees
and other revenue *
|
|
|
834.1 |
|
|
|
775.9 |
|
|
|
2,488.7 |
|
|
|
2,244.9 |
|
Net
investment income
|
|
|
229.8 |
|
|
|
262.1 |
|
|
|
731.7 |
|
|
|
864.9 |
|
Net
realized capital losses
|
|
|
(356.8 |
) |
|
|
(16.6 |
) |
|
|
(437.4 |
) |
|
|
(64.4 |
) |
Total
revenue
|
|
|
7,624.6 |
|
|
|
6,961.3 |
|
|
|
23,191.4 |
|
|
|
20,455.2 |
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
care costs **
|
|
|
5,216.6 |
|
|
|
4,323.1 |
|
|
|
15,456.1 |
|
|
|
12,814.1 |
|
Current
and future benefits
|
|
|
464.7 |
|
|
|
537.6 |
|
|
|
1,474.4 |
|
|
|
1,704.7 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
282.2 |
|
|
|
267.1 |
|
|
|
861.6 |
|
|
|
793.7 |
|
General
and administrative expenses
|
|
|
1,152.5 |
|
|
|
1,004.3 |
|
|
|
3,372.0 |
|
|
|
2,896.6 |
|
Total
operating expenses
|
|
|
1,434.7 |
|
|
|
1,271.4 |
|
|
|
4,233.6 |
|
|
|
3,690.3 |
|
Interest
expense
|
|
|
60.5 |
|
|
|
44.0 |
|
|
|
171.5 |
|
|
|
129.1 |
|
Amortization
of other acquired intangible assets
|
|
|
25.4 |
|
|
|
25.9 |
|
|
|
80.5 |
|
|
|
69.5 |
|
Reduction
of reserve for anticipated future losses on discontinued
products
|
|
|
- |
|
|
|
- |
|
|
|
(43.8 |
) |
|
|
(64.3 |
) |
Total
benefits and expenses
|
|
|
7,201.9 |
|
|
|
6,202.0 |
|
|
|
21,372.3 |
|
|
|
18,343.4 |
|
Income
before income taxes
|
|
|
422.7 |
|
|
|
759.3 |
|
|
|
1,819.1 |
|
|
|
2,111.8 |
|
Income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
197.9 |
|
|
|
167.5 |
|
|
|
685.8 |
|
|
|
644.3 |
|
Deferred
|
|
|
(52.5 |
) |
|
|
95.1 |
|
|
|
(56.1 |
) |
|
|
84.9 |
|
Total
income taxes
|
|
|
145.4 |
|
|
|
262.6 |
|
|
|
629.7 |
|
|
|
729.2 |
|
Net
income
|
|
$ |
277.3 |
|
|
$ |
496.7 |
|
|
$ |
1,189.4 |
|
|
$ |
1,382.6 |
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.59 |
|
|
$ |
.98 |
|
|
$ |
2.47 |
|
|
$ |
2.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
.58 |
|
|
$ |
.95 |
|
|
$ |
2.40 |
|
|
$ |
2.61 |
|
*
Fees and other revenue include administrative services contract member
co-payments and plan sponsor reimbursements related to our mail order and
specialty pharmacy operations of $12.8 million and $42.7 million (net of
pharmaceutical and processing costs of $403.4 million and $1.2 billion) for the
three and nine months ended September 30, 2008, respectively, and $12.6 million
and $40.9 million (net of pharmaceutical and processing costs of $357.5 million
and $1.1 billion) for the three and nine months ended September 30, 2007,
respectively.
**
Health care costs have been reduced by Insured member co-payment revenue related
to our mail order and specialty pharmacy operations of $27.5 million and $83.9
million for the three and nine months ended September 30, 2008, respectively,
and $25.3 million and $75.7 million for the three and nine months ended
September 30, 2007, respectively.
Refer
to accompanying Condensed Notes to Consolidated Financial Statements
(Unaudited).
Consolidated
Balance Sheets
|
|
(Unaudited)
|
|
|
|
|
|
|
At
September 30,
|
|
|
At
December 31,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
864.2 |
|
|
$ |
1,254.0 |
|
Investments
|
|
|
695.4 |
|
|
|
851.5 |
|
Premiums
receivable, net
|
|
|
672.2 |
|
|
|
479.8 |
|
Other
receivables, net
|
|
|
625.5 |
|
|
|
589.1 |
|
Accrued
investment income
|
|
|
197.8 |
|
|
|
189.2 |
|
Collateral
received under securities loan agreements
|
|
|
1,116.5 |
|
|
|
1,142.4 |
|
Income
taxes receivable
|
|
|
32.1 |
|
|
|
- |
|
Deferred
income taxes
|
|
|
311.0 |
|
|
|
321.7 |
|
Other
current assets
|
|
|
436.2 |
|
|
|
438.7 |
|
Total
current assets
|
|
|
4,950.9 |
|
|
|
5,266.4 |
|
Long-term
investments
|
|
|
16,960.9 |
|
|
|
17,040.1 |
|
Reinsurance
recoverables
|
|
|
1,034.6 |
|
|
|
1,093.2 |
|
Goodwill
|
|
|
5,082.4 |
|
|
|
5,081.0 |
|
Other
acquired intangible assets, net
|
|
|
699.9 |
|
|
|
780.4 |
|
Property
and equipment, net
|
|
|
421.8 |
|
|
|
364.0 |
|
Deferred
income taxes
|
|
|
209.4 |
|
|
|
- |
|
Other
long-term assets
|
|
|
2,059.3 |
|
|
|
1,850.2 |
|
Separate
Accounts assets (Note 15)
|
|
|
5,843.4 |
|
|
|
19,249.4 |
|
Total
assets
|
|
$ |
37,262.6 |
|
|
$ |
50,724.7 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders' equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Health
care costs payable
|
|
$ |
2,434.8 |
|
|
$ |
2,177.4 |
|
Future
policy benefits
|
|
|
746.3 |
|
|
|
763.8 |
|
Unpaid
claims
|
|
|
527.1 |
|
|
|
625.9 |
|
Unearned
premiums
|
|
|
265.4 |
|
|
|
198.4 |
|
Policyholders'
funds
|
|
|
778.3 |
|
|
|
668.2 |
|
Collateral
payable under securities loan agreements
|
|
|
1,116.5 |
|
|
|
1,142.4 |
|
Short-term
debt
|
|
|
482.2 |
|
|
|
130.7 |
|
Income
taxes payable
|
|
|
- |
|
|
|
5.9 |
|
Accrued
expenses and other current liabilities
|
|
|
1,982.0 |
|
|
|
1,962.0 |
|
Total
current liabilities
|
|
|
8,332.6 |
|
|
|
7,674.7 |
|
Future
policy benefits
|
|
|
6,932.6 |
|
|
|
7,253.2 |
|
Unpaid
claims
|
|
|
1,274.5 |
|
|
|
1,234.1 |
|
Policyholders'
funds
|
|
|
1,205.8 |
|
|
|
1,225.7 |
|
Long-term
debt
|
|
|
3,637.9 |
|
|
|
3,138.5 |
|
Income
taxes payable
|
|
|
11.4 |
|
|
|
13.0 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
146.4 |
|
Other
long-term liabilities
|
|
|
727.8 |
|
|
|
751.3 |
|
Separate
Accounts liabilities (Note 15)
|
|
|
5,843.4 |
|
|
|
19,249.4 |
|
Total
liabilities
|
|
|
27,966.0 |
|
|
|
40,686.3 |
|
Commitments
and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock ($.01 par value; 2.8 billion shares authorized; 461.1 million and
496.3 million
|
|
|
|
|
|
|
|
|
shares
issued and outstanding in 2008 and 2007, respectively) and additional
paid-in capital
|
|
|
325.9 |
|
|
|
188.8 |
|
Retained
earnings
|
|
|
9,636.6 |
|
|
|
10,138.0 |
|
Accumulated
other comprehensive loss
|
|
|
(665.9 |
) |
|
|
(288.4 |
) |
Total
shareholders' equity
|
|
|
9,296.6 |
|
|
|
10,038.4 |
|
Total
liabilities and shareholders' equity
|
|
$ |
37,262.6 |
|
|
$ |
50,724.7 |
|
Refer
to accompanying Condensed Notes to Consolidated Financial Statements
(Unaudited).
Consolidated
Statements of Shareholders’ Equity
(Unaudited)
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
Stock
and
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Shares
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Shareholders'
|
|
|
Comprehensive
|
|
(Millions)
|
|
Outstanding
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
|
|
Income
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
|
496.3 |
|
|
$ |
188.8 |
|
|
$ |
10,138.0 |
|
|
$ |
(288.4 |
) |
|
$ |
10,038.4 |
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
1,189.4 |
|
|
|
- |
|
|
|
1,189.4 |
|
|
$ |
1,189.4 |
|
Other
comprehensive loss (Note 6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(369.7 |
) |
|
|
(369.7 |
) |
|
|
|
|
Net
foreign currency losses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1.4 |
) |
|
|
(1.4 |
) |
|
|
|
|
Net
derivative losses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7.9 |
) |
|
|
(7.9 |
) |
|
|
|
|
Pension
and OPEB plans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
|
|
Other
comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(377.5 |
) |
|
|
(377.5 |
) |
|
|
(377.5 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
811.9 |
|
Common
shares issued for benefit plans,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
tax benefits
|
|
|
2.4 |
|
|
|
137.5 |
|
|
|
- |
|
|
|
- |
|
|
|
137.5 |
|
|
|
|
|
Repurchases
of common shares
|
|
|
(37.6 |
) |
|
|
(.4 |
) |
|
|
(1,672.4 |
) |
|
|
- |
|
|
|
(1,672.8 |
) |
|
|
|
|
Dividends
declared
|
|
|
- |
|
|
|
- |
|
|
|
(18.4 |
) |
|
|
- |
|
|
|
(18.4 |
) |
|
|
|
|
Balance
at September 30, 2008
|
|
|
461.1 |
|
|
$ |
325.9 |
|
|
$ |
9,636.6 |
|
|
$ |
(665.9 |
) |
|
$ |
9,296.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2007
|
|
|
516.0 |
|
|
$ |
366.2 |
|
|
$ |
9,403.6 |
|
|
$ |
(511.8 |
) |
|
$ |
9,258.0 |
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
1,382.6 |
|
|
|
- |
|
|
|
1,382.6 |
|
|
$ |
1,382.6 |
|
Other
comprehensive loss (Note 6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(49.6 |
) |
|
|
(49.6 |
) |
|
|
|
|
Net
foreign currency gains
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4.2 |
|
|
|
4.2 |
|
|
|
|
|
Net
derivative gains
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1.4 |
|
|
|
1.4 |
|
|
|
|
|
Pension
and OPEB plans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16.5 |
|
|
|
16.5 |
|
|
|
|
|
Other
comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(27.5 |
) |
|
|
(27.5 |
) |
|
|
(27.5 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,355.1 |
|
Common
shares issued for benefit plans,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
tax benefits
|
|
|
11.5 |
|
|
|
334.6 |
|
|
|
- |
|
|
|
- |
|
|
|
334.6 |
|
|
|
|
|
Repurchases
of common shares
|
|
|
(27.1 |
) |
|
|
(592.4 |
) |
|
|
(728.5 |
) |
|
|
- |
|
|
|
(1,320.9 |
) |
|
|
|
|
Dividends
declared
|
|
|
- |
|
|
|
- |
|
|
|
(20.0 |
) |
|
|
- |
|
|
|
(20.0 |
) |
|
|
|
|
Balance
at September 30, 2007
|
|
|
500.4 |
|
|
$ |
108.4 |
|
|
$ |
10,037.7 |
|
|
$ |
(539.3 |
) |
|
$ |
9,606.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer
to accompanying Condensed Notes to Consolidated Financial Statements
(Unaudited).
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,189.4 |
|
|
$ |
1,382.6 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Net
realized capital losses
|
|
|
437.4 |
|
|
|
64.4 |
|
Depreciation
and amortization
|
|
|
279.9 |
|
|
|
231.9 |
|
Stock-based
compensation expense
|
|
|
80.2 |
|
|
|
68.8 |
|
Equity
in earnings of affiliates, net
|
|
|
65.4 |
|
|
|
(65.1 |
) |
Allowance
on reinsurance recoverable
|
|
|
42.2 |
|
|
|
- |
|
(Accretion)
amortization of net investment (discount) premium
|
|
|
(5.0 |
) |
|
|
5.4 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued
investment income
|
|
|
(8.6 |
) |
|
|
(1.2 |
) |
Premiums
due and other receivables
|
|
|
(261.4 |
) |
|
|
(202.3 |
) |
Income
taxes
|
|
|
(95.5 |
) |
|
|
(9.8 |
) |
Other
assets and other liabilities
|
|
|
(55.2 |
) |
|
|
(110.7 |
) |
Health
care and insurance liabilities
|
|
|
82.7 |
|
|
|
43.1 |
|
Other,
net
|
|
|
.9 |
|
|
|
(.6 |
) |
Net
cash provided by operating activities
|
|
|
1,752.4 |
|
|
|
1,406.5 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sales and maturities of investments
|
|
|
9,143.2 |
|
|
|
7,477.3 |
|
Cost
of investments purchased
|
|
|
(10,195.3 |
) |
|
|
(7,272.5 |
) |
Additions
of property, equipment and software
|
|
|
(304.6 |
) |
|
|
(272.3 |
) |
Cash
used for acquisitions, net of cash acquired
|
|
|
- |
|
|
|
(505.9 |
) |
Net
cash used for investing activities
|
|
|
(1,356.7 |
) |
|
|
(573.4 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt, net of issuance
costs
|
|
|
484.8 |
|
|
|
- |
|
Net
issuance of short-term debt
|
|
|
352.0 |
|
|
|
485.4 |
|
Deposits
and interest credited for investment contracts
|
|
|
5.9 |
|
|
|
7.1 |
|
Withdrawals
of investment contracts
|
|
|
(8.0 |
) |
|
|
(6.6 |
) |
Common
shares issued under benefit plans
|
|
|
28.8 |
|
|
|
136.7 |
|
Stock-based
compensation tax benefits
|
|
|
23.8 |
|
|
|
129.4 |
|
Common
shares repurchased
|
|
|
(1,672.8 |
) |
|
|
(1,334.5 |
) |
Net
cash used for financing activities
|
|
|
(785.5 |
) |
|
|
(582.5 |
) |
Net
(decrease) increase in cash and cash equivalents
|
|
|
(389.8 |
) |
|
|
250.6 |
|
Cash
and cash equivalents, beginning of period
|
|
|
1,254.0 |
|
|
|
880.0 |
|
Cash
and cash equivalents, end of period
|
|
$ |
864.2 |
|
|
$ |
1,130.6 |
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
137.1 |
|
|
$ |
104.9 |
|
Income
taxes paid
|
|
|
701.8 |
|
|
|
604.8 |
|
Refer
to accompanying Condensed Notes to Consolidated Financial Statements
(Unaudited).
Condensed
Notes to Consolidated Financial Statements
(Unaudited)
We
conduct our operations in three business segments:
|
·
|
Health Care consists of
medical, pharmacy benefits management, dental and vision plans offered on
both an Insured basis (where we assume all or a majority of the risk for
medical and dental care costs) and an employer-funded basis (where the
plan sponsor under an administrative services contract (“ASC”) assumes all
or a majority of this risk). Medical products include
point-of-service (“POS”), preferred provider organization (“PPO”), health
maintenance organization (“HMO”) and indemnity benefit
plans. Medical products also include health savings accounts
(“HSAs”) and Aetna HealthFund®,
consumer-directed health plans that combine traditional POS or PPO and/or
dental coverage, subject to a deductible, with an accumulating benefit
account (which may be funded by the plan sponsor and/or the member in the
case of HSAs). We also offer Medicare and Medicaid products and
services and specialty products, such as medical management and data
analytics services, behavioral health plans and stop loss insurance, as
well as products that provide access to our provider network in select
markets.
|
|
·
|
Group Insurance
primarily includes group life insurance products offered on an Insured
basis, including basic group term life, group universal life, supplemental
or voluntary programs and accidental death and dismemberment
coverage. Group Insurance also includes (i) group disability
products offered to employers on both an Insured and an ASC basis which
consist primarily of short-term and long-term disability insurance (and
products which combine both), (ii) absence management services offered to
employers, which include short-term and long-term disability
administration and leave management, and (iii) long-term care products
that were offered primarily on an Insured basis, which provide benefits
covering the cost of care in private home settings, adult day care,
assisted living or nursing facilities. We no longer solicit or
accept new long-term care customers, and we are working with our customers
on an orderly transition of this product to other
carriers.
|
|
·
|
Large Case Pensions
manages a variety of retirement products (including pension and annuity
products) primarily for tax qualified pension plans. These
products provide a variety of funding and benefit payment distribution
options and other services. Large Case Pensions also includes
certain discontinued products (refer to Note 14 beginning on page 17 for
additional information).
|
2.
|
Summary
of Significant Accounting Policies
|
Interim
Financial Statements
These
interim financial statements rely on estimates, including assumptions as to
annualized tax rates. In the opinion of management, all adjustments
necessary for a fair statement of results for the interim periods have been
made. All such adjustments are of a normal, recurring
nature. The accompanying unaudited consolidated financial statements
and related notes should be read in conjunction with the consolidated financial
statements and related notes presented in our 2007 Annual Report on Form 10-K
(our “2007 Annual Report”). Certain financial information that is
normally included in annual financial statements prepared in accordance with
U.S. generally accepted accounting principles (“GAAP”), but that is not required
for interim reporting purposes, has been condensed or omitted. We
have omitted certain footnote disclosures that would substantially duplicate the
disclosures in our 2007 Annual Report, unless the information contained in those
disclosures materially changed.
Principles
of Consolidation
These
unaudited consolidated financial statements have been prepared in accordance
with GAAP and include the accounts of Aetna and the subsidiaries that we
control. All significant intercompany balances have been eliminated
in consolidation.
New
Accounting Standards
Fair
Value Measurements
Effective
January 1, 2008, we adopted Statement of Financial Accounting Standards (“FAS”)
No. 157, “Fair Value
Measurements.” FAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. FAS 157 does not require new fair value measurements. In February
2008, the Financial Accounting Standards Board (“FASB”) released FASB Staff
Position No. FAS 157-2, “Effective Date of FASB Statement
No. 157,” which delays the effective date of FAS 157 for nonfinancial
assets and liabilities until January 2009. Refer to Note 11 beginning on page 12
for additional information on our fair value measurements.
In
October 2008, the FASB released FASB Staff Position (“FSP”) FAS 157-3 “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active,” which
clarifies the application of FAS 157 in situations in which the market for a
financial asset is inactive. FSP FAS 157-3 was effective for us on
September 30, 2008, but did not have a material impact on our financial position
or results of operations.
Future
Application of Accounting Standards
Business
Combinations and Noncontrolling Interests
In December
2007, the FASB released FAS 141R, “Business Combinations” and
FAS 160, “Noncontrolling
Interests in Consolidated Financial Statements.” Both
standards will be effective for transactions that occur after January 1,
2009.
FAS 141R
applies to all business combinations and will require the acquiring entity to
recognize the assets and liabilities acquired at their respective fair
values. This standard changes the accounting for business
combinations in several areas. If we complete an acquisition after
the effective date of FAS 141R, some of these changes could result in increased
volatility in our results of operations and financial position. For
example, transaction costs, which are currently capitalized in a business
combination, will be expensed as incurred. Additionally,
pre-acquisition contingencies (such as in-process lawsuits acquired) and
contingent consideration (such as additional consideration that would be payable
upon the occurrence of specified events in the future) will be recorded at fair
value at the acquisition date, with subsequent changes in fair value reflected
in our results of operations. Under current accounting guidance,
adjustments to these contingencies are reflected in the allocation of purchase
price if they occur within a certain period of time after the acquisition
date.
FAS 160
amends previous guidance and establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary (often otherwise referred to as the
minority interest) and for deconsolidation of the subsidiary.
Enhanced
Derivative Disclosures
In March
2008, the FASB issued FAS 161, “Disclosures about Derivative
Instruments and Hedging Activities,” which will require enhanced
disclosures concerning our use of derivative instruments and any related hedging
activity. FAS 161 becomes effective on January 1, 2009 and will not impact
our financial position or results of operations because it only affects our
financial statement disclosures.
Enhanced
Disclosures of Credit Derivatives
In September 2008, the FASB released
FSP FAS 133-1 and FIN 45-4 “Disclosure about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161.” This FSP will require
additional financial statement disclosures concerning the sale of credit
derivatives and will be effective on December 31, 2008. This FSP will
not impact our financial position or results of operations because it only
affects our financial statement disclosures.
3.
|
Earnings
Per Common Share
|
Basic
earnings per share (“EPS”) is computed by dividing income available to common
shareholders (i.e., the numerator) by the weighted average number of common
shares outstanding (i.e., the denominator) during the
quarter. Diluted EPS is computed in a similar manner, except that the
weighted average number of common shares
outstanding is adjusted for the dilutive effects of stock options, stock
appreciation rights and other dilutive financial instruments, but only in the
quarters in which such effect is dilutive.
The
computations of basic and diluted EPS for the three and nine months ended
September 30, 2008 and 2007 are as follows:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
(Millions,
except per common share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
277.3 |
|
|
$ |
496.7 |
|
|
$ |
1,189.4 |
|
|
$ |
1,382.6 |
|
Weighted
average shares used to compute basic EPS
|
|
|
468.0 |
|
|
|
507.4 |
|
|
|
480.9 |
|
|
|
512.2 |
|
Dilutive
effect of outstanding stock-based compensation awards (1)
|
|
|
12.3 |
|
|
|
16.5 |
|
|
|
14.1 |
|
|
|
18.4 |
|
Weighted
average shares used to compute diluted EPS
|
|
|
480.3 |
|
|
|
523.9 |
|
|
|
495.0 |
|
|
|
530.6 |
|
Basic
EPS
|
|
$ |
.59 |
|
|
$ |
.98 |
|
|
$ |
2.47 |
|
|
$ |
2.70 |
|
Diluted
EPS
|
|
$ |
.58 |
|
|
$ |
.95 |
|
|
$ |
2.40 |
|
|
$ |
2.61 |
|
(1)
|
Approximately
14.4 million and 8.2 million stock appreciation rights (“SARs”) (with
exercise prices ranging from $40.24 to $59.76) were not included in the
calculation of diluted EPS for the three and nine months ended September
30, 2008, respectively, and approximately 3.5 million SARs (with exercise
prices ranging from $44.22 to $52.29) were not included in the calculation
of diluted EPS for the nine months ended September 30, 2007 as their
exercise prices were greater than the average market price of our common
stock during such periods.
|
For
the three and nine months ended September 30, 2008 and 2007, selling expenses
(which include broker commissions, the variable component of our internal sales
force compensation and premium taxes) and general and administrative expenses
were as follows:
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
September
30,
|
|
|
September
30,
|
(Millions)
|
2008
|
2007
|
|
|
2008
|
2007
|
Selling
expenses
|
$ 282.2
|
$ 267.1
|
|
$ |
861.6
|
$ 793.7
|
General
and administrative expenses:
|
|
|
|
|
|
|
Salaries
and related benefits
|
660.1
|
599.4
|
|
|
1,934.6
|
1,724.8
|
Other
general and administrative expenses
|
492.4
|
404.9
|
|
|
1,437.4
|
1,171.8
|
Total
general and administrative expenses
|
1,152.5
|
1,004.3
|
|
|
3,372.0
|
2,896.6
|
Total
operating expenses
|
$ 1,434.7
|
$ 1,271.4
|
|
$ |
4,233.6
|
$ 3,690.3
|
Total
investments at September 30, 2008 and December 31, 2007 were as
follows:
|
September
30, 2008
|
|
|
December
31, 2007
|
|
(Millions)
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
Debt
and equity securities available for sale
|
$ |
622.0 |
|
|
$ |
13,965.4 |
|
|
$ |
14,587.4 |
|
|
$ |
822.9 |
|
|
$ |
14,309.0 |
|
|
$ |
15,131.9 |
|
Mortgage
loans
|
|
72.7 |
|
|
|
1,640.3 |
|
|
|
1,713.0 |
|
|
|
27.3 |
|
|
|
1,485.3 |
|
|
|
1,512.6 |
|
Other
investments
|
|
.7 |
|
|
|
1,355.2 |
|
|
|
1,355.9 |
|
|
|
1.3 |
|
|
|
1,245.8 |
|
|
|
1,247.1 |
|
Total
investments
|
$ |
695.4 |
|
|
$ |
16,960.9 |
|
|
$ |
17,656.3 |
|
|
$ |
851.5 |
|
|
$ |
17,040.1 |
|
|
$ |
17,891.6 |
|
Net
Investment Income
Sources
of net investment income for the three and nine months ended September 30, 2008
and 2007 were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Debt
securities
|
|
$ |
222.3 |
|
|
$ |
210.1 |
|
|
$ |
654.1 |
|
|
$ |
647.2 |
|
Mortgage
loans
|
|
|
30.1 |
|
|
|
38.1 |
|
|
|
86.6 |
|
|
|
94.6 |
|
Other
|
|
|
(13.8 |
) |
|
|
22.9 |
|
|
|
17.2 |
|
|
|
150.4 |
|
Gross
investment income
|
|
|
238.6 |
|
|
|
271.1 |
|
|
|
757.9 |
|
|
|
892.2 |
|
Less:
investment expenses
|
|
|
(8.8 |
) |
|
|
(9.0 |
) |
|
|
(26.2 |
) |
|
|
(27.3 |
) |
Net
investment income (1)
|
|
$ |
229.8 |
|
|
$ |
262.1 |
|
|
$ |
731.7 |
|
|
$ |
864.9 |
|
(1)
|
Includes
amounts related to experience-rated contract holders of $26.9 million and
$81.3 million during the three and nine months ended September 30, 2008,
respectively, and $28.3 million and $89.8 million during the three and
nine months ended September 30, 2007, respectively. These
amounts generally do not impact our results of operations because
this net investment income is credited to experience-rated contract
holders and is included in current and future benefits in our statements
of income.
|
Unrealized
Capital Losses and Net Realized Capital Losses
When
a debt or equity security is in an unrealized capital loss position, we monitor
the duration and severity of the loss to determine if sufficient market recovery
can occur within a reasonable period of time. We also determine if we have
the intent and ability to hold the investment until it recovers in
value. Summarized below are the debt and equity securities we held at
September 30, 2008 and December 31, 2007, that were in an unrealized capital
loss position, aggregated by the length of time the investments have been in
that position:
|
|
Less
than 12 months
|
|
|
Greater
than 12 months
|
|
|
|
|
Total
(1)
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
Fair
|
|
|
Unrealized
|
|
(Millions)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
Value
|
|
|
Losses
|
|
September
30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities
|
|
$ |
253.3 |
|
|
$ |
3.1 |
|
|
$ |
22.5 |
|
|
$ |
.4 |
|
|
|
|
$ |
275.8 |
|
|
$ |
3.5 |
|
States,
municipalities and political subdivisions
|
|
|
1,411.2 |
|
|
|
58.8 |
|
|
|
122.1 |
|
|
|
18.0 |
|
|
|
|
|
1,533.3 |
|
|
|
76.8 |
|
U.S.
corporate securities
|
|
|
3,455.0 |
|
|
|
237.4 |
|
|
|
1,158.0 |
|
|
|
253.1 |
|
|
|
|
|
4,613.0 |
|
|
|
490.5 |
|
Foreign
securities
|
|
|
1,153.4 |
|
|
|
58.0 |
|
|
|
175.3 |
|
|
|
37.4 |
|
|
|
|
|
1,328.7 |
|
|
|
95.4 |
|
Mortgage-backed
and other asset-backed securities
|
|
|
1,271.9 |
|
|
|
56.3 |
|
|
|
629.7 |
|
|
|
85.0 |
|
|
|
|
|
1,901.6 |
|
|
|
141.3 |
|
Redeemable
preferred securities
|
|
|
184.1 |
|
|
|
15.1 |
|
|
|
141.4 |
|
|
|
69.7 |
|
|
|
|
|
325.5 |
|
|
|
84.8 |
|
Total
debt securities
|
|
|
7,728.9 |
|
|
|
428.7 |
|
|
|
2,249.0 |
|
|
|
463.6 |
|
|
|
|
|
9,977.9 |
|
|
|
892.3 |
|
Equity
securities
|
|
|
20.4 |
|
|
|
3.8 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
20.4 |
|
|
|
3.8 |
|
Total
debt and equity securities
|
|
$ |
7,749.3 |
|
|
$ |
432.5 |
|
|
$ |
2,249.0 |
|
|
$ |
463.6 |
|
|
|
|
$ |
9,998.3 |
|
|
$ |
896.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities
|
|
$ |
41.7 |
|
|
$ |
.4 |
|
|
$ |
5.3 |
|
|
$ |
.1 |
|
|
|
|
$ |
47.0 |
|
|
$ |
.5 |
|
States,
municipalities and political subdivisions
|
|
|
246.4 |
|
|
|
3.1 |
|
|
|
130.5 |
|
|
|
2.2 |
|
|
|
|
|
376.9 |
|
|
|
5.3 |
|
U.S.
corporate securities
|
|
|
1,699.8 |
|
|
|
60.5 |
|
|
|
787.6 |
|
|
|
37.9 |
|
|
|
|
|
2,487.4 |
|
|
|
98.4 |
|
Foreign
securities
|
|
|
278.2 |
|
|
|
4.7 |
|
|
|
262.5 |
|
|
|
13.8 |
|
|
|
|
|
540.7 |
|
|
|
18.5 |
|
Mortgage-backed
and other asset-backed securities
|
|
|
330.0 |
|
|
|
10.1 |
|
|
|
977.4 |
|
|
|
18.3 |
|
|
|
|
|
1,307.4 |
|
|
|
28.4 |
|
Redeemable
preferred securities
|
|
|
116.4 |
|
|
|
11.9 |
|
|
|
100.3 |
|
|
|
15.3 |
|
|
|
|
|
216.7 |
|
|
|
27.2 |
|
Total
debt securities
|
|
|
2,712.5 |
|
|
|
90.7 |
|
|
|
2,263.6 |
|
|
|
87.6 |
|
|
|
|
|
4,976.1 |
|
|
|
178.3 |
|
Equity
securities
|
|
|
.3 |
|
|
|
.4 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
.3 |
|
|
|
.4 |
|
Total
debt and equity securities
|
|
$ |
2,712.8 |
|
|
$ |
91.1 |
|
|
$ |
2,263.6 |
|
|
$ |
87.6 |
|
|
|
|
$ |
4,976.4 |
|
|
$ |
178.7 |
|
(1)
|
At
September 30, 2008 and December 31, 2007, debt and equity securities in an
unrealized loss position of $291.8 million
and $60.9
million, respectively, and related fair value of $2.6 billion and $1.4 billion,
respectively, related to discontinued and experience-rated
products.
|
We
have reviewed the securities in the table on page 8 and have concluded
that these are performing assets generating investment income to support the
needs of our business. Furthermore, we have the ability and intent to
hold these securities until their cost can be recovered. Therefore we did
not take an other-than-temporary impairment loss on these
investments. Unrealized losses at September 30, 2008 were generally
caused by the widening of credit spreads relative to the interest rates on U.S.
Treasury securities primarily caused by the recent decline in valuations in the
financial sector. Unrealized losses at December 31, 2007 were
generally caused by the widening of credit spreads relative to the interest
rates on U.S. Treasury securities and an increase in interest rates on U.S.
Treasury securities.
Net
realized capital losses for the three and nine months ended September 30, 2008
and 2007, excluding amounts related to experience-rated contract holders and
discontinued products, were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Other-than-temporary
impairments of debt securities-yield related
|
|
$ |
(185.2 |
) |
|
$ |
(22.3 |
) |
|
$ |
(302.3 |
) |
|
$ |
(93.1 |
) |
Other-than-temporary
impairments of debt securities-credit related
|
|
|
(107.4 |
) |
|
|
(1.5 |
) |
|
|
(121.9 |
) |
|
|
(1.1 |
) |
Sales
of debt securities
|
|
|
(44.1 |
) |
|
|
2.7 |
|
|
|
(5.2 |
) |
|
|
28.6 |
|
Other
|
|
|
(20.1 |
) |
|
|
4.5 |
|
|
|
(8.0 |
) |
|
|
1.2 |
|
Pretax
net realized capital losses
|
|
$ |
(356.8 |
) |
|
$ |
(16.6 |
) |
|
$ |
(437.4 |
) |
|
$ |
(64.4 |
) |
Recognizing
a yield-related other-than-temporary impairment (“OTTI”) loss requires
significant diligence and judgment. We carefully evaluate all
relevant facts and circumstances for each investment in our
analyses. We have concluded that the investments for which a
yield-related OTTI was recognized continue to be performing assets generating
investment income to support the needs of our businesses. However,
accounting guidance requires us to assert our intent and ability to hold such
securities until market recovery to avoid loss recognition. In order
to maintain appropriate flexibility in managing our investment portfolio,
we do not make this assertion and therefore we recorded these
yield-related OTTI losses.
Yield-related
OTTI losses were primarily due to the widening of credit spreads relative to the
interest rates on U.S. Treasury securities in 2008 and increases in the interest
rates on U.S. Treasury securities in 2007. During 2008, significant
declines in the U.S. housing market have resulted in the credit and other
capital markets experiencing volatility and limitations on the ability of
companies to issue debt or equity securities. The lack of available
credit, lack of confidence in the financial sector, increased volatility in the
financial markets and reduced business activity has resulted in credit spreads
widening during 2008, particularly during the three months ended September 30,
2008.
The
credit-related OTTI losses include $103 million pretax in the three and
nine months ended September 30, 2008 related to investments in debt securities
of Lehman Brothers Holdings Inc. and Washington Mutual, Inc.
6.
|
Other
Comprehensive Loss
|
Shareholders’
equity included the following activity in accumulated other comprehensive loss
for the nine months ended September 30, 2008 and 2007.
|
|
Net
Unrealized Gains (Losses)
|
|
|
Pension
and OPEB Plans
|
|
|
|
|
(Millions)
|
|
Securities
|
|
|
Foreign
Currency
|
|
|
Derivatives
|
|
|
Unrecognized
Net
Actuarial
Losses
|
|
|
Unrecognized
Prior
Service
Cost
|
|
|
Total
Accumulated
Other
Comprehensive
Loss
|
|
Nine
Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
$ |
53.3 |
|
|
$ |
15.2 |
|
|
$ |
(8.2 |
) |
|
$ |
(395.8 |
) |
|
$ |
47.1 |
|
|
$ |
(288.4 |
) |
Unrealized
net losses arising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
the period ($(1,164.2) pretax)
|
|
|
(645.5 |
) |
|
|
(1.4 |
) |
|
|
(13.6 |
) |
|
|
- |
|
|
|
- |
|
|
|
(660.5 |
) |
Reclassification
to earnings ($435.4 pretax)
|
|
|
275.8 |
|
|
|
- |
|
|
|
5.7 |
|
|
|
4.3 |
|
|
|
(2.8 |
) |
|
|
283.0 |
|
Other
comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
the period
|
|
|
(369.7 |
) |
|
|
(1.4 |
) |
|
|
(7.9 |
) |
|
|
4.3 |
|
|
|
(2.8 |
) |
|
|
(377.5 |
) |
Balance
at September 30, 2008
|
|
$ |
(316.4 |
) |
|
$ |
13.8 |
|
|
$ |
(16.1 |
) |
|
$ |
(391.5 |
) |
|
$ |
44.3 |
|
|
$ |
(665.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2007
|
|
$ |
66.5 |
|
|
$ |
11.6 |
|
|
$ |
7.6 |
|
|
$ |
(620.0 |
) |
|
$ |
22.5 |
|
|
$ |
(511.8 |
) |
Unrealized
net (losses) gains arising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
the period ($(134.5) pretax)
|
|
|
(94.6 |
) |
|
|
4.2 |
|
|
|
3.0 |
|
|
|
- |
|
|
|
- |
|
|
|
(87.4 |
) |
Reclassification
to earnings ($92.2 pretax)
|
|
|
45.0 |
|
|
|
- |
|
|
|
(1.6 |
) |
|
|
15.9 |
|
|
|
.6 |
|
|
|
59.9 |
|
Other
comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
the period
|
|
|
(49.6 |
) |
|
|
4.2 |
|
|
|
1.4 |
|
|
|
15.9 |
|
|
|
.6 |
|
|
|
(27.5 |
) |
Balance
at September 30, 2007
|
|
$ |
16.9 |
|
|
$ |
15.8 |
|
|
$ |
9.0 |
|
|
$ |
(604.1 |
) |
|
$ |
23.1 |
|
|
$ |
(539.3 |
) |
7.
|
Employee
Benefit Plans
|
Defined
Benefit Retirement Plans
Components
of the net periodic benefit (income) cost of our noncontributory defined benefit
pension plans and other postretirement benefit (“OPEB”) plans for the three and
nine months ended September 30, 2008 and 2007 were as follows:
|
|
Pension
Plans
|
|
|
OPEB
Plans
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
10.8 |
|
|
$ |
10.8 |
|
|
$ |
32.4 |
|
|
$ |
32.4 |
|
|
$ |
.1 |
|
|
$ |
.1 |
|
|
$ |
.3 |
|
|
$ |
.3 |
|
Interest
cost
|
|
|
78.0 |
|
|
|
74.8 |
|
|
|
234.0 |
|
|
|
224.4 |
|
|
|
5.0 |
|
|
|
5.4 |
|
|
|
15.0 |
|
|
|
16.2 |
|
Expected
return on plan assets
|
|
|
(121.1 |
) |
|
|
(116.4 |
) |
|
|
(363.3 |
) |
|
|
(349.2 |
) |
|
|
(1.0 |
) |
|
|
(1.0 |
) |
|
|
(3.0 |
) |
|
|
(3.0 |
) |
Amortization
of prior service cost
|
|
|
(.5 |
) |
|
|
1.2 |
|
|
|
(1.5 |
) |
|
|
3.6 |
|
|
|
(.9 |
) |
|
|
(.9 |
) |
|
|
(2.7 |
) |
|
|
(2.7 |
) |
Recognized
net actuarial loss
|
|
|
1.6 |
|
|
|
6.9 |
|
|
|
4.8 |
|
|
|
20.7 |
|
|
|
.6 |
|
|
|
1.4 |
|
|
|
1.8 |
|
|
|
4.2 |
|
Net
periodic benefit (income) cost
|
|
$ |
(31.2 |
) |
|
$ |
(22.7 |
) |
|
$ |
(93.6 |
) |
|
$ |
(68.1 |
) |
|
$ |
3.8 |
|
|
$ |
5.0 |
|
|
$ |
11.4 |
|
|
$ |
15.0 |
|
The
carrying value of our long-term debt at September 30, 2008 and December 31, 2007
was as follows:
|
|
September
30,
|
|
|
December
31,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
Senior
notes, 5.75%, due 2011
|
|
$ |
449.8 |
|
|
$ |
449.7 |
|
Senior
notes, 7.875%, due 2011
|
|
|
449.1 |
|
|
|
448.8 |
|
Senior
notes, 6.0%, due 2016
|
|
|
746.6 |
|
|
|
746.2 |
|
Senior
notes, 6.5%, due 2018
|
|
|
498.5 |
|
|
|
- |
|
Senior
notes, 6.625%, due 2036
|
|
|
798.5 |
|
|
|
798.5 |
|
Senior
notes, 6.75%, due 2037
|
|
|
695.4 |
|
|
|
695.3 |
|
Total
long-term debt
|
|
$ |
3,637.9 |
|
|
$ |
3,138.5 |
|
In September 2008, we issued
$500 million of 6.5% senior notes due 2018 (the “Senior Notes”) and used the
proceeds to repay commercial paper borrowings. In August 2008,
we hedged the change in cash flows associated with the then-anticipated interest
payments generated by the issuance of $250 million of the Senior Notes by
purchasing forward starting swaps that we terminated in September
2008. Upon the termination of the swaps, we paid approximately $10
million to our counterparty, which was recorded as an other comprehensive loss
and is being amortized as an increase of interest expense over the life of the
Senior Notes.
At
September 30, 2008 and December 31, 2007, we had approximately $482 million and
$100 million, respectively, of commercial paper outstanding with a weighted
average interest rate of 4.59% and 5.44%, respectively. At December
31, 2007, there was approximately $31 million outstanding under a short-term
credit program that is secured by assets of certain of our
subsidiaries.
At
September 30, 2008, we had an unsecured $1.5 billion, five-year revolving credit
agreement (the “Facility”) with several financial institutions which terminates
in March 2013, and may be expanded to a maximum of $2.0 billion upon our
agreement with one or more financial institutions. The Facility contains a
financial covenant that requires us to maintain a ratio of total debt to
consolidated capitalization as of the end of each fiscal quarter ending on or
after December 31, 2007 at or below .5 to 1.0. For this purpose,
consolidated capitalization equals the sum of shareholders’ equity (excluding
any overfunded or underfunded status of our pension and OPEB plans in accordance
with FAS 158 and any net unrealized capital gains and losses) and total debt (as
defined in the Facility). We met this requirement at September 30,
2008. There were no amounts outstanding under the Facility at
September 30, 2008.
On
September 28, 2007, February 29, 2008 and June 27, 2008, our Board of Directors
(the “Board”) authorized share repurchase programs for the repurchase of up to
$1.25 billion, $750 million and $750 million, respectively, of our common
stock. During the nine month period ended September 30, 2008, we
repurchased approximately 38 million shares of common stock at a cost of
approximately $1.7 billion, completing the September 28, 2007 and February 29,
2008 authorizations and utilizing a portion of the June 27, 2008
authorization. At September 30, 2008, we had remaining authorization
to repurchase an aggregate of up to approximately $729 million of common stock
under the June 27, 2008 Board authorization.
On February
8,
2008, approximately 4.4 million
SARs, .2 million
restricted stock units (“RSUs”) and .4 million performance stock units (“PSUs”)
were granted to certain employees. If exercised by the employee, the
SARs will be settled in common stock, net of taxes, based on the appreciation of
our common stock price over $50.70 per
share. For each RSU granted, employees receive one share of common
stock, net of taxes, at the end of the vesting period. The SARs and
RSUs will become 100% vested three years from the grant date, with one-third of
the SARs and RSUs vesting each year. The PSUs vest on December 31,
2009. The number of vested PSUs (which could be as high as 200% of
the original number of units granted) is dependent upon the degree to which we
achieve performance goals as determined by the Board’s Committee on Compensation
and Organization. The value of each vested PSU is equal to one share
of common stock, net of taxes.
On September
26, 2008, our Board declared an annual cash dividend of $.04 per share to
shareholders of record at the close of business on November 13,
2008. This dividend will be paid on November 28, 2008.
10.
|
Dividend
Restrictions and Statutory Surplus
|
Under
regulatory requirements at September 30, 2008, the amount of dividends that may
be paid to Aetna through the end of 2008 by our insurance and HMO subsidiaries
without prior approval by regulatory authorities is approximately $1.1 billion
in the aggregate. There are no such restrictions on distributions
from Aetna to its shareholders.
The
combined statutory capital and surplus of our insurance and HMO subsidiaries was
$5.6 billion and $5.3 billion at September 30, 2008 and December 31, 2007,
respectively.
11.
|
Fair
Value Measurements
|
Effective
January 1, 2008, we adopted FAS 157 for our financial assets. FAS 157
defines fair value, expands disclosure requirements and specifies a hierarchy of
valuation techniques. The following are the levels of the hierarchy and a brief
description of the type of valuation information (“inputs”) that qualifies a
financial asset for each level:
|
o
|
Level 1 – Unadjusted
quoted prices for identical assets or liabilities in active
markets.
|
|
o
|
Level 2 – Inputs other
than Level 1 that are based on observable market data. These
include: quoted prices for similar assets in active markets, quoted prices
for identical assets in inactive markets, inputs that are observable that
are not prices (such as interest rates, credit risks, etc.) and inputs
that are derived from or corroborated by observable
markets.
|
|
o
|
Level 3 – Developed from
unobservable data, reflecting our own
assumptions.
|
When quoted
prices in active markets for identical assets are available, we use these quoted
market prices to determine the fair value of financial assets and classify these
assets as Level 1. In other cases where a quoted market price for
identical assets in an active market is either not available or not observable,
we estimate fair values using valuation methodologies based on available and
observable market information or by using a matrix pricing
model. These financial assets would then be classified as Level
2. If quoted market prices are not available, we determine fair value
using broker quotes or an internal analysis of each investment’s financial
performance and cash flow projections. In these instances, financial
assets will be classified based upon the lowest level of input that is
significant to the valuation. Thus, financial assets may be classified in Level
3 even though there may be some significant inputs that may be readily
available.
The
following is a description of the valuation methodologies used for financial
assets measured at fair value, including the general classification of such
assets pursuant to the valuation hierarchy.
Debt Securities - Where quoted
prices are available in an active market, our debt securities are classified in
Level 1 of the fair value hierarchy. Our Level 1 debt securities are
comprised primarily of U.S. government securities. If Level 1
valuations are not available, the fair value is determined using models such as
matrix pricing, which uses quoted market prices of debt securities with similar
characteristics or discounted cash flows to estimate fair value. We
obtained one price for each of our Level 2 debt securities based on these inputs
and did not adjust any prices at September 30,
2008.
We also
value a certain amount of debt securities using Level 3 inputs. For
Level 3 debt securities, fair values are determined by outside brokers or, in
the case of certain private placement securities, are priced by internal staff.
Outside brokers determine the value of these debt securities through a
combination of their knowledge of the current pricing environment and market
flows. We obtained one non-binding broker quote for each of these
Level 3 debt securities and did not adjust any quotes at September 30,
2008. The total fair value of our broker quoted securities was
approximately $414 million at September 30, 2008. Examples of these
Level 3 debt securities include certain U.S. and foreign corporate securities
and structured products. For certain private placement securities,
internal staff determine the value of these debt securities by analyzing spreads
of corporate and sector indices as well as interest spreads of comparable public
bonds. Examples
of these Level 3 debt securities include certain U.S. and foreign securities and
certain tax exempt municipal securities.
Equity Securities - We
currently have two classifications of equity securities: those that are publicly
traded and those that are privately held. Our publicly traded
securities are classified as Level 1 because quoted prices are available for
these securities in an active market. For privately held equity
securities, there is no active market; therefore, we classify these securities
as Level 3 because we must price these securities through an internal analysis
of each investment’s financial statements and cash flow
projections.
Derivatives - Our derivative
instruments are valued using models that primarily use market observable inputs
and therefore are classified as Level 2 because they are traded in markets where
quoted market prices are not readily available.
Our
financial assets with changes in fair value that are measured on a recurring
basis at September 30, 2008 were as follows (there were no liabilities measured
at fair value at September 30, 2008):
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Debt
Securities
|
|
$ |
1,173.0 |
|
|
$ |
12,845.6 |
|
|
$ |
525.3 |
|
|
$ |
14,543.9 |
|
Equity
Securities
|
|
|
4.2 |
|
|
|
- |
|
|
|
39.3 |
|
|
|
43.5 |
|
Derivatives
|
|
|
- |
|
|
|
.7 |
|
|
|
- |
|
|
|
.7 |
|
Total
|
|
$ |
1,177.2 |
|
|
$ |
12,846.3 |
|
|
$ |
564.6 |
|
|
$ |
14,588.1 |
|
The changes
in the balances of Level 3 financial assets for the three and nine months ended
September 30, 2008 were as follows:
|
|
Three
Months Ended
September
30, 2008
|
|
|
Nine
Months Ended
September
30, 2008
|
|
(Millions)
|
|
Debt
Securities
|
|
|
Equity
Securities
|
|
|
Total
|
|
|
Debt
Securities
|
|
|
Equity
Securities
|
|
|
Total
|
|
Beginning
balance
|
|
$ |
609.6 |
|
|
$ |
42.3 |
|
|
$ |
651.9 |
|
|
$ |
642.5 |
|
|
$ |
38.9 |
|
|
$ |
681.4 |
|
Net
realized and unrealized capital (losses) gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
(16.4 |
) |
|
|
- |
|
|
|
(16.4 |
) |
|
|
(25.9 |
) |
|
|
- |
|
|
|
(25.9 |
) |
Included
in other comprehensive income
|
|
|
(8.1 |
) |
|
|
- |
|
|
|
(8.1 |
) |
|
|
(11.8 |
) |
|
|
- |
|
|
|
(11.8 |
) |
Other
(1)
|
|
|
(11.4 |
) |
|
|
4.3 |
|
|
|
(7.1 |
) |
|
|
(23.5 |
) |
|
|
14.3 |
|
|
|
(9.2 |
) |
Purchases,
sales and maturities
|
|
|
(19.6 |
) |
|
|
(7.3 |
) |
|
|
(26.9 |
) |
|
|
(32.8 |
) |
|
|
(29.6 |
) |
|
|
(62.4 |
) |
Transfers
in or (out) of Level 3
(2)
|
|
|
(28.8 |
) |
|
|
- |
|
|
|
(28.8 |
) |
|
|
(23.2 |
) |
|
|
15.7 |
|
|
|
(7.5 |
) |
Ending
Balance
|
|
$ |
525.3 |
|
|
$ |
39.3 |
|
|
$ |
564.6 |
|
|
$ |
525.3 |
|
|
$ |
39.3 |
|
|
$ |
564.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
of Level 3 net unrealized capital losses included in net
income
|
|
$ |
(14.3 |
) |
|
$ |
- |
|
|
$ |
(14.3 |
) |
|
$ |
(24.0 |
) |
|
$ |
- |
|
|
$ |
(24.0 |
) |
(1)
|
Reflects
realized and unrealized capital gains and losses on investments supporting
our experience-rated and discontinued products, which do not affect our
results of operations.
|
(2)
|
For
financial assets that are transferred into Level 3, we use the fair value
of the assets at the end of the reporting period. For financial
assets that are transferred out of Level 3, we use the fair value of the
assets at the beginning of the reporting
period.
|
Separate
Accounts
Separate
Account assets in Large Case Pensions represent funds maintained to meet
specific objectives of contract holders. Since contract holders bear
the investment risk of these assets, a corresponding Separate Account liability
has been established equal to the assets. These assets and
liabilities are carried at fair value. Investment income and capital
gains and losses accrue directly to such contract holders. The assets
of each account are legally segregated and are not subject to claims arising
from our other businesses. Deposits, withdrawals, net investment
income and realized and unrealized capital gains and losses on Separate Account
assets are not reflected in our statements of income or cash
flows.
Separate
Account assets include debt and equity securities and derivative
instruments. The valuation methodologies used for these assets are
similar to the methodologies described beginning on page 12. Separate
Account assets also include investments in real estate that are carried at fair
value. The following is a description of the valuation methodology
used to price these real estate investments, including the general
classification pursuant to the valuation hierarchy.
Real Estate - The values of
the underlying real estate investments are estimated using generally accepted
valuation techniques and give consideration to the investment
structure. An appraisal of the underlying real estate for each of
these investments is performed annually. In the quarters in which an investment
is not appraised or its valuation is not updated, fair value is based on
available market information. The valuation of a real estate
investment is adjusted only if there has been a significant change in economic
circumstances related to the investment since acquisition or the most recent
independent valuation and upon the appraiser’s review and concurrence with the
valuation. Further, these valuations have been prepared giving
consideration to the income, cost and sales comparison approaches of estimating
property value. These valuations do not necessarily represent the prices at
which the real estate investments would sell, since market prices of real estate
investments can only be determined by negotiation between a willing buyer and
seller. Therefore, these investment values are classified as Level
3.
Separate
Account financial assets with changes in fair value measured on a recurring
basis at September 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Debt
Securities
|
|
$ |
649.8 |
|
|
$ |
2,378.8 |
|
|
$ |
261.3 |
|
|
$ |
3,289.9 |
|
Equity
Securities
|
|
|
1,746.9 |
|
|
|
4.2 |
|
|
|
- |
|
|
|
1,751.1 |
|
Derivatives
|
|
|
- |
|
|
|
.7 |
|
|
|
- |
|
|
|
.7 |
|
Real
Estate
|
|
|
- |
|
|
|
- |
|
|
|
95.4 |
|
|
|
95.4 |
|
Total
(1)
|
|
$ |
2,396.7 |
|
|
$ |
2,383.7 |
|
|
$ |
356.7 |
|
|
$ |
5,137.1 |
|
(1)
|
Excludes
$706.3 million of cash and cash equivalents and other
receivables.
|
The changes
in the balances of Level 3 Separate Account financial assets for the three and
nine months ended September 30, 2008 were as follows:
|
|
Three
Months Ended
September
30, 2008
|
|
|
Nine
Months Ended
September
30, 2008
|
|
(Millions)
|
|
Debt
Securities
|
|
|
Real
Estate
|
|
|
Total
|
|
|
Debt
Securities
|
|
|
Real
Estate
|
|
|
Total
|
|
Beginning
balance
|
|
$ |
267.7 |
|
|
$ |
837.5 |
|
|
$ |
1,105.2 |
|
|
$ |
291.4 |
|
|
$ |
12,541.8 |
|
|
$ |
12,833.2 |
|
Total
gains (losses) accrued to contract holders
|
|
|
.5 |
|
|
|
(33.1 |
) |
|
|
(32.6 |
) |
|
|
(5.4 |
) |
|
|
(36.8 |
) |
|
|
(42.2 |
) |
Purchases,
sales and maturities
|
|
|
(.6 |
) |
|
|
(42.6 |
) |
|
|
(43.2 |
) |
|
|
(12.4 |
) |
|
|
(88.8 |
) |
|
|
(101.2 |
) |
Net
transfers out of Level 3
(1)
|
|
|
(6.3 |
) |
|
|
- |
|
|
|
(6.3 |
) |
|
|
(12.3 |
) |
|
|
- |
|
|
|
(12.3 |
) |
Transfers
of Separate Account assets
(2)
|
|
|
- |
|
|
|
(666.4 |
) |
|
|
(666.4 |
) |
|
|
- |
|
|
|
(12,320.8 |
) |
|
|
(12,320.8 |
) |
Ending
Balance
|
|
$ |
261.3 |
|
|
$ |
95.4 |
|
|
$ |
356.7 |
|
|
$ |
261.3 |
|
|
$ |
95.4 |
|
|
$ |
356.7 |
|
(1)
|
For
financial assets that are transferred into Level 3, we use the fair value
of the assets at the end of the reporting period. For financial
assets that are transferred out of Level 3, we use the fair value of the
assets at the beginning of the reporting period.
|
(2)
|
On
September 30, 2008 and February 29, 2008, approximately $692 million and
$11.7 billion, respectively, of our Separate Account assets were
transitioned out of our business. Refer to Note 15 on page 21
for additional information concerning this
transfer.
|
12.
|
Commitments
and Contingencies
|
Litigation
and Regulatory Proceedings
Out-of-Network
Provider Proceedings
Michele
Cooper, et al. v. Aetna Life Insurance Company, et al. is a purported nationwide
class action lawsuit that was filed in the United States District Court for the
District of New Jersey (the “New Jersey Federal Court”) on July 30, 2007 and
subsequently amended. The plaintiffs allege that we violated state
law, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”),
and the Racketeer Influenced and Corrupt
Organizations
Act (“RICO”) in connection with various practices related to the payment of
claims for services rendered to our members by providers with whom we do not
have a contract (“out-of-network providers”), resulting in increased
out-of-pocket payments by our members. The purported classes together
consist of all members in substantially all of our health benefit plans who
received services from out-of-network providers from 2001 to date for which we
allowed less than the full amount billed by the provider. The
plaintiffs seek reimbursement of all unpaid benefits, recalculation and
repayment of deductible and coinsurance amounts, unspecified damages and treble
damages, statutory penalties, injunctive and declaratory relief, plus interest,
costs and attorneys’ fees, and seek to disqualify us from acting as a fiduciary
of any benefit plan that is subject to ERISA. This case is similar to
other actions pending in the New Jersey Federal Court and elsewhere against us
and certain of our competitors. We intend to defend this case
vigorously.
Weintraub,
et al. v. Ingenix, et al. is a purported nationwide class action lawsuit that
was filed in the United States District Court for the District of Connecticut on
April 29, 2008 and subsequently amended. The plaintiff alleges that we and the
other defendants violated federal antitrust laws and New York state consumer
protection laws in connection with the use of information provided by Ingenix,
Inc. in paying claims for services rendered to our members by out-of-network
providers, resulting in increased out-of-pocket payments by our
members. The purported classes together consist of all persons who at
any time since April 29, 2004, have been members in any of our health insurance
plans that pay benefits to members who receive services from out-of-network
providers. The plaintiff seeks actual damages, treble and other punitive
damages, and injunctive relief, plus costs and attorneys’ fees. This case is
similar to other actions pending in the New Jersey Federal Court and elsewhere
against us and certain of our competitors. We intend to defend this case
vigorously.
In addition,
we have received subpoenas from the New York Attorney General (the “NYAG”) with
respect to an industry-wide investigation into certain payment practices with
respect to out-of-network providers. The NYAG has stated that he
intends to initiate litigation against one of our competitors in connection with
this investigation. We also have received a subpoena and/or requests
for documents and other information from other attorneys general relating to our
out-of-network provider payment practices.
It is
reasonably possible that the NYAG or others could initiate additional litigation
or additional regulatory action against us and/or one or more of our competitors
with respect to provider payment practices.
Healthcare
Payor Industry Class Action Litigation
From 1999
through early 2003, we were involved in purported class action lawsuits as part
of a wave of similar actions targeting the health care payor industry and, in
particular, the conduct of business by managed care companies. These
cases, brought on behalf of health care providers (the “Provider Cases”),
alleged generally that we and other defendant managed care organizations engaged
in coercive behavior or a variety of improper business practices in dealing with
health care providers and conspired with one another regarding this purported
wrongful conduct.
Effective
May 21, 2003, we and representatives of over 900,000 physicians, state and other
medical societies entered into an agreement (the “Physician Settlement
Agreement”) settling the lead physician Provider Case, which was pending in the
United States District Court for the Southern District of Florida (the “Florida
Federal Court”). We believe that the Physician Settlement Agreement, which
received final court approval, resolved all then pending Provider Cases filed on
behalf of physicians that did not opt out of the settlement. We continue
to work with plaintiffs’ representatives to address the issues covered by the
Physician Settlement Agreement.
In 2003, we
recorded a charge of $75 million ($115 million pretax) in connection with the
Physician Settlement Agreement, net of an estimated insurance receivable of $72
million pretax. We believe our insurance policies with third party insurers
apply to this matter and have been vigorously pursuing recovery from those
insurers in Pennsylvania state court (the “Coverage Litigation”). In May 2006,
the Philadelphia, Pennsylvania state trial court issued a summary judgment
ruling dismissing all of our claims in the Coverage Litigation. As a
result of the state trial court’s ruling, we concluded in 2006 that the
estimated insurance receivable of $72 million pretax that was recorded in
connection with the Physician Settlement Agreement was no longer probable of
collection for accounting purposes, and therefore, in 2006, we wrote-off that
recoverable while continuing to vigorously pursue our claims. On
April 11, 2008, the state intermediate appellate court reversed the state trial
court’s 2006 ruling
and granted
us summary judgment on substantially all of our claims in the Coverage
Litigation. Our third party insurers have requested further review of
that ruling, but that review is at the discretion of the state’s highest
court. Further proceedings also may occur in the state trial court,
including proceedings concerning our bad faith claims against certain of our
insurers and claims by certain of our insurers to rescind the underlying
policies. We intend to continue to vigorously pursue recovery from
our third party insurers in the Coverage Litigation.
Several
Provider Cases filed in 2003 on behalf of purported classes of chiropractors
and/or all non-physician health care providers also made factual and legal
allegations similar to those contained in the other Provider Cases, including
allegations of violations of RICO. These Provider Cases sought
various forms of relief, including unspecified damages, treble damages, punitive
damages and injunctive relief. These Provider Cases were transferred
to the Florida Federal Court for consolidated pretrial
proceedings. All of these Provider Cases have been either voluntarily
withdrawn or dismissed by the Florida Federal Court.
Securities
Class Action Litigation
Two
purported class action lawsuits were pending in the United States District Court
for the Eastern District of Pennsylvania (the “Pennsylvania Federal Court”)
against Aetna and certain of its current or former officers and/or directors. On
October 24, 2007, the Southeastern Pennsylvania Transportation Authority filed
suit on behalf of all purchasers of Aetna common stock between October 27, 2005
and April 27, 2006. The second lawsuit was filed on November 27,
2007, by the Plumbers and Pipefitters Local 51 Pension Fund on behalf of all
purchasers of Aetna common stock between July 28, 2005 and July 27,
2006. On June 3, 2008, plaintiffs in these two lawsuits filed a
consolidated complaint in the Pennsylvania Federal Court on behalf of all
purchasers of Aetna common stock between October 27, 2005 and July 27,
2006. The consolidated complaint (the “Securities Class Action
Litigation”) supersedes and replaces the two previous complaints. The
plaintiffs allege that Aetna and four of its current or former officers and/or
directors, John W. Rowe, M.D., Ronald A. Williams, Alan M. Bennett and Craig R.
Callen (collectively, the “Defendants”), violated federal securities
laws. The plaintiffs allege misrepresentations and omissions
regarding, among other things, our medical benefit ratios and health plan
pricing practices, as well as insider trading by Dr. Rowe and Messrs. Bennett
and Callen. The plaintiffs seek compensatory damages plus interest
and attorneys’ fees, among other remedies. The Defendants intend to
vigorously defend the Securities Class Action Litigation, which is in its
preliminary stages.
Other
Litigation and Regulatory Proceedings
We are
involved in numerous other lawsuits arising, for the most part, in the ordinary
course of our business operations, including employment litigation and claims of
bad faith, medical malpractice, non-compliance with state and federal regulatory
regimes, marketing misconduct, failure to timely or appropriately pay medical
claims, rescission of insurance coverage and other litigation in our Health Care
and Group Insurance businesses. Some of these other lawsuits are or
are purported to be class actions. We intend to defend these matters
vigorously.
In addition,
our current and past business practices are subject to review by, and from time
to time we receive subpoenas and other requests for information from, various
state insurance and health care regulatory authorities and attorneys general and
other state and federal authorities, including the investigation by, and
subpoenas and requests from, attorneys general described above under
“Out-of-Network Provider Proceedings.” There also continues to be
heightened review by regulatory authorities of and increased litigation
regarding the health care benefits industry’s business and reporting practices,
including utilization management, complaint and grievance processing,
information privacy, provider network structure (including the use of
performance-based networks), delegated arrangements and claim payment practices
(including payments to out-of-network providers). As a leading
national health care benefits organization, we regularly are the subject of such
reviews. These reviews may result, and have resulted, in changes to
or clarifications of our business practices, as well as fines, penalties or
other sanctions.
We are
unable to predict at this time the ultimate outcome of the matters described
above, and it is reasonably possible that their outcome could be material to
us.
Summarized
financial information of our segments for the three and nine months ended
September 30, 2008 and 2007 was as follows:
|
|
Health
|
|
|
Group
|
|
|
Large
Case
|
|
|
Corporate
|
|
|
Total
|
|
(Millions)
|
|
Care
|
|
|
Insurance
|
|
|
Pensions
|
|
|
Interest
|
|
|
Company
|
|
Three
months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
7,257.7 |
|
|
$ |
448.5 |
|
|
$ |
45.4 |
|
|
$ |
- |
|
|
$ |
7,751.6 |
|
Operating
earnings (loss) (1)
|
|
|
520.0 |
|
|
|
47.2 |
|
|
|
8.8 |
|
|
|
(39.3 |
) |
|
|
536.7 |
|
Three
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
6,193.1 |
|
|
$ |
468.7 |
|
|
$ |
54.0 |
|
|
$ |
- |
|
|
$ |
6,715.8 |
|
Operating
earnings (loss) (1)
|
|
|
488.6 |
|
|
|
38.2 |
|
|
|
9.2 |
|
|
|
(28.6 |
) |
|
|
507.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
21,399.5 |
|
|
$ |
1,335.3 |
|
|
$ |
162.3 |
|
|
$ |
- |
|
|
$ |
22,897.1 |
|
Operating
earnings (loss) (1)
|
|
|
1,435.5 |
|
|
|
121.4 |
|
|
|
27.2 |
|
|
|
(111.5 |
) |
|
|
1,472.6 |
|
Nine
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
18,077.5 |
|
|
$ |
1,405.6 |
|
|
$ |
171.6 |
|
|
$ |
- |
|
|
$ |
19,654.7 |
|
Operating
earnings (loss) (1)
|
|
|
1,331.3 |
|
|
|
108.5 |
|
|
|
26.7 |
|
|
|
(83.9 |
) |
|
|
1,382.6 |
|
(1)
|
Operating
earnings (loss) excludes net realized capital gains or losses and the
other items described in the reconciliation
below.
|
The following table
reconciles operating earnings to net income for the three and nine months
ended September 30, 2008 and 2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Operating
earnings
|
|
$ |
536.7 |
|
|
$ |
507.4 |
|
|
$ |
1,472.6 |
|
|
$ |
1,382.6 |
|
Net
realized capital losses
|
|
|
(232.0 |
) |
|
|
(10.7 |
) |
|
|
(284.3 |
) |
|
|
(41.8 |
) |
Allowance
on reinsurance recoverable
(1)
|
|
|
(27.4 |
) |
|
|
- |
|
|
|
(27.4 |
) |
|
|
- |
|
Reduction
of reserve for anticipated future losses on discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
products
(2)
|
|
|
- |
|
|
|
- |
|
|
|
28.5 |
|
|
|
41.8 |
|
Net
income
|
|
$ |
277.3 |
|
|
$ |
496.7 |
|
|
$ |
1,189.4 |
|
|
$ |
1,382.6 |
|
(1)
|
As
a result of the liquidation proceedings of Lehman Re Ltd. (“Lehman Re”), a
subsidiary of Lehman Brothers Holdings Inc., we recorded an allowance
against our reinsurance recoverable from Lehman Re of $27.4 million ($42.2
million pretax) in the three and nine months ended September 30,
2008. This reinsurance is on a closed book of paid-up group
whole life insurance business. We believe this charge neither
relates to the ordinary course of our business nor reflects our underlying
business performance, and therefore, we have excluded it from operating
earnings for the three and nine months ended September 30, 2008.
|
(2)
|
We
reduced the reserve for anticipated future losses on discontinued products
by $28.5 million ($43.8 million pretax) and $41.8 million ($64.3 million
pretax) in the nine months ended September 30, 2008 and 2007,
respectively. We believe excluding any changes to the reserve
for anticipated future losses on discontinued products provides more
useful information as to our continuing products and is consistent with
the treatment of the results of operations of these discontinued products,
which are credited or charged to the reserve and do not affect our results
of operations. Refer to Note 14 below for additional
information on the reduction of the reserve for anticipated future losses
on discontinued products.
|
14.
|
Discontinued
Products
|
We
discontinued the sale of our fully guaranteed large case pension products
(single-premium annuities (“SPAs”) and guaranteed investment contracts) in
1993. Under our accounting for these discontinued products, we
established a reserve for anticipated future losses from these products, and we
review it quarterly. As long as the reserve continues to represent
our then best estimate of expected future losses, results of operations of the
discontinued products, including net realized capital gains and losses, are
credited/charged to the reserve and do not affect our results of
operations. Our results of operations would be adversely affected to
the extent that future losses on these products are greater than anticipated and
favorably affected to the extent that future losses are less than anticipated.
The current reserve reflects our best estimate of anticipated future
losses.
The
factors contributing to changes in the reserve for anticipated future losses
are: operating income or loss (including investment income and mortality and
retirement gains or losses) and realized capital gains or
losses. Operating income or loss is equal to revenue less
expenses. Mortality and retirement gains or losses reflect our
experience related to SPAs. A mortality gain (loss) occurs when an
annuitant or a beneficiary dies sooner (later) than expected. A
retirement gain (loss) occurs when an annuitant retires later (earlier) than
expected.
At
the time of discontinuance, a receivable from Large Case Pensions’ continuing
products equivalent to the net present value of the anticipated cash flow
shortfalls was established for the discontinued products. Interest on
the receivable is accrued at the discount rate that was used to calculate the
reserve. The offsetting payable, on which interest is similarly accrued, is
reflected in continuing products. Interest on the payable generally
offsets the investment income on the assets available to fund the
shortfall. The receivable from continuing products was $429 million
and $438 million at September 30, 2008 and December 31, 2007,
respectively. These amounts were eliminated in
consolidation.
Results
of discontinued products for the three months ended September 30, 2008 and 2007
were as follows (pretax):
(Millions)
|
|
Results
|
|
|
Charged
(Credited) to Reserve for Anticipated
Future
Losses
|
|
|
Net (1)
|
|
Three
months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
37.8 |
|
|
$ |
- |
|
|
$ |
37.8 |
|
Net
realized capital losses
|
|
|
(90.0 |
) |
|
|
90.0 |
|
|
|
- |
|
Interest
earned on receivable from continuing products
|
|
|
6.5 |
|
|
|
- |
|
|
|
6.5 |
|
Other
revenue
|
|
|
5.1 |
|
|
|
- |
|
|
|
5.1 |
|
Total
revenue
|
|
|
(40.6 |
) |
|
|
90.0 |
|
|
|
49.4 |
|
Current
and future benefits
|
|
|
76.0 |
|
|
|
(29.1 |
) |
|
|
46.9 |
|
Operating
expenses
|
|
|
2.5 |
|
|
|
- |
|
|
|
2.5 |
|
Total
benefits and expenses
|
|
|
78.5 |
|
|
|
(29.1 |
) |
|
|
49.4 |
|
Results
of discontinued products
|
|
$ |
(119.1 |
) |
|
$ |
119.1 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
60.1 |
|
|
$ |
- |
|
|
$ |
60.1 |
|
Net
realized capital gains
|
|
|
7.1 |
|
|
|
(7.1 |
) |
|
|
- |
|
Interest
earned on receivable from continuing products
|
|
|
6.5 |
|
|
|
- |
|
|
|
6.5 |
|
Other
revenue
|
|
|
1.8 |
|
|
|
- |
|
|
|
1.8 |
|
Total
revenue
|
|
|
75.5 |
|
|
|
(7.1 |
) |
|
|
68.4 |
|
Current
and future benefits
|
|
|
79.4 |
|
|
|
(13.6 |
) |
|
|
65.8 |
|
Operating
expenses
|
|
|
2.6 |
|
|
|
- |
|
|
|
2.6 |
|
Total
benefits and expenses
|
|
|
82.0 |
|
|
|
(13.6 |
) |
|
|
68.4 |
|
Results
of discontinued products
|
|
$ |
(6.5 |
) |
|
$ |
6.5 |
|
|
$ |
- |
|
(1)
|
Amounts
are reflected in the statements of income, except for interest earned on
the receivable from continuing products, which was eliminated in
consolidation.
|
Results
of discontinued products for the nine months ended September 30, 2008 and 2007
were as follows (pretax):
(Millions)
|
|
Results
|
|
Charged
(Credited) to Reserve for Anticipated
Future
Losses
|
|
Net
(1) |
|
Nine
months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
147.0 |
|
|
$ |
- |
|
|
$ |
147.0 |
|
Net
realized capital losses
|
|
|
(100.7 |
) |
|
|
100.7 |
|
|
|
- |
|
Interest
earned on receivable from continuing products
|
|
|
20.0 |
|
|
|
- |
|
|
|
20.0 |
|
Other
revenue
|
|
|
19.5 |
|
|
|
- |
|
|
|
19.5 |
|
Total
revenue
|
|
|
85.8 |
|
|
|
100.7 |
|
|
|
186.5 |
|
Current
and future benefits
|
|
|
230.2 |
|
|
|
(51.0 |
) |
|
|
179.2 |
|
Operating
expenses
|
|
|
7.3 |
|
|
|
- |
|
|
|
7.3 |
|
Total
benefits and expenses
|
|
|
237.5 |
|
|
|
(51.0 |
) |
|
|
186.5 |
|
Results
of discontinued products
|
|
$ |
(151.7 |
) |
|
$ |
151.7 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$ |
228.4 |
|
|
$ |
- |
|
|
$ |
228.4 |
|
Net
realized capital gains
|
|
|
34.8 |
|
|
|
(34.8 |
) |
|
|
- |
|
Interest
earned on receivable from continuing products
|
|
|
20.4 |
|
|
|
- |
|
|
|
20.4 |
|
Other
revenue
|
|
|
15.4 |
|
|
|
- |
|
|
|
15.4 |
|
Total
revenue
|
|
|
299.0 |
|
|
|
(34.8 |
) |
|
|
264.2 |
|
Current
and future benefits
|
|
|
240.1 |
|
|
|
16.3 |
|
|
|
256.4 |
|
Operating
expenses
|
|
|
7.8 |
|
|
|
- |
|
|
|
7.8 |
|
Total
benefits and expenses
|
|
|
247.9 |
|
|
|
16.3 |
|
|
|
264.2 |
|
Results
of discontinued products
|
|
$ |
51.1 |
|
|
$ |
(51.1 |
) |
|
$ |
- |
|
(1)
|
Amounts
are reflected in the statements of income, except for interest earned on
the receivable from continuing products, which was eliminated in
consolidation.
|
Assets
and liabilities supporting discontinued products at September 30, 2008 and
December 31, 2007 were as follows:
(1)
|
|
September
30,
|
|
|
December
31,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
Assets:
|
|
|
|
|
|
|
Debt
and equity securities available for sale
|
|
$ |
2,522.4 |
|
|
$ |
3,049.3 |
|
Mortgage
loans
|
|
|
604.7 |
|
|
|
554.0 |
|
Other
investments
|
|
|
622.5 |
|
|
|
581.0 |
|
Total
investments
|
|
|
3,749.6 |
|
|
|
4,184.3 |
|
Other
assets
|
|
|
101.4 |
|
|
|
142.6 |
|
Collateral
received under securities loan agreements
|
|
|
184.9 |
|
|
|
309.6 |
|
Current
and deferred income taxes
|
|
|
88.4 |
|
|
|
121.4 |
|
Receivable
from continuing products (2)
|
|
|
429.4 |
|
|
|
437.9 |
|
Total
assets
|
|
$ |
4,553.7 |
|
|
$ |
5,195.8 |
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Future
policy benefits
|
|
$ |
3,487.1 |
|
|
$ |
3,614.5 |
|
Policyholders
funds
|
|
|
17.0 |
|
|
|
21.0 |
|
Reserve
for anticipated future losses on discontinued products
|
|
|
864.7 |
|
|
|
1,052.3 |
|
Collateral
payable under securities loan agreements
|
|
|
184.9 |
|
|
|
309.6 |
|
Other
liabilities
|
|
|
- |
|
|
|
198.4 |
|
Total
liabilities
|
|
$ |
4,553.7 |
|
|
$ |
5,195.8 |
|
(1)
|
Assets
supporting the discontinued products are distinguished from assets
supporting continuing products.
|
(2)
|
The
receivable from continuing products is eliminated in
consolidation.
|
At
September 30, 2008 and December 31, 2007, net unrealized capital (losses) gains
on debt securities available for sale are included in the table on page 19 in
other assets and other liabilities, respectively, and are not reflected in
consolidated shareholders’ equity on our balance sheets. The reserve
for anticipated future losses on discontinued products is included in future
policy benefits on our balance sheets.
The
reserve for anticipated future losses on discontinued products represents the
present value (at the risk-free rate of return at the time of discontinuance,
consistent with the duration of the liabilities) of the difference between the
expected cash flows from the assets supporting discontinued products and the
cash flows expected to be required to meet the obligations of the outstanding
contracts. Calculation of the reserve for anticipated future losses
requires projection of both the amount and the timing of cash flows over
approximately the next 30 years, including consideration of, among other things,
future investment results, participant withdrawal and mortality rates and the
cost of asset management and customer service. Since 1993, there have
been no significant changes to the assumptions underlying the calculation of the
reserve related to the projection of the amount and timing of cash flows, except
as noted below.
The
projection of future investment results considers assumptions for interest
rates, bond discount rates and performance of mortgage loans and real estate
assets. Mortgage loan cash flow assumptions represent management’s
best estimate of current and future levels of rent growth, vacancy and expenses
based upon market conditions at each reporting date. The performance
of real estate assets has been consistently estimated using the most recent
forecasts available. Since 1997, a debt security default assumption
has been included to reflect historical default experience, since the debt
security portfolio increased as a percentage of the overall investment portfolio
and reflected more debt security credit risk, concurrent with the declines in
the commercial mortgage loan and real estate portfolios.
The
previous years’ actual participant withdrawal experience is used for the current
year assumption. Prior to 1995, we used the 1983 Group Annuitant
Mortality table published by the Society of Actuaries (the
“Society”). In 1995, the Society published the 1994 Uninsured
Pensioner’s Mortality table, which we have used since then.
Our
assumptions about the cost of asset management and customer service reflect
actual investment and general expenses allocated over invested
assets.
The
activity in the reserve for anticipated future losses on discontinued products
for the nine months ended September 30, 2008 was as follows
(pretax):
(Millions)
|
|
|
|
Reserve
for anticipated future losses on discontinued products at December 31,
2007
|
|
$ |
1,052.3 |
|
Operating
loss
|
|
|
(62.0 |
) |
Net
realized capital losses
|
|
|
(100.7 |
) |
Mortality
and other
|
|
|
11.0 |
|
Tax
benefits
|
|
|
7.9 |
|
Reserve
reduction
|
|
|
(43.8 |
) |
Reserve
for anticipated future losses on discontinued products at September 30,
2008
|
|
$ |
864.7 |
|
Management
reviews the adequacy of the discontinued products reserve quarterly and, as a
result, the reserve was reduced by $44 million ($29 million after tax)
and $64 million
($42 million
after tax) in the nine months ended September 30, 2008 and 2007,
respectively. The 2008 reserve reduction was primarily due to
favorable mortality and retirement experience compared to assumptions we
previously made in estimating the reserve. The 2007 reserve reduction
was primarily due to favorable investment performance and favorable mortality
and retirement experience compared to assumptions we previously made in
estimating the reserve. The current reserve reflects management’s
best estimate of anticipated future losses.
Distributions
on discontinued products for the three and nine months ended September 30, 2008
and 2007 were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Scheduled
contract maturities, settlements and benefit payments
|
|
$ |
113.3 |
|
|
$ |
117.8 |
|
|
$ |
343.6 |
|
|
$ |
353.9 |
|
Participant-directed
withdrawals
|
|
|
- |
|
|
|
.1 |
|
|
|
.1 |
|
|
|
.2 |
|
In
1996, we entered into a contract with UBS Realty Investors, LLC (“UBS”)
(formerly known as Allegis Realty Investors, LLC) under which mortgage loan and
real estate Separate Account assets would transition out of our
business. On September 30, 2008 and February 29, 2008, approximately
$692 million and $11.7 billion, respectively, of our mortgage loan and real
estate Separate Account assets transitioned out of our
business. These transitions did not and will not impact our
shareholders’ equity, results of operations or cash flows.
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
Aetna
Inc.:
We
have reviewed the consolidated balance sheet of Aetna Inc. and subsidiaries as
of September 30, 2008, the related consolidated statements of income for the
three-month and nine-month periods ended September 30, 2008 and 2007 and the
related consolidated statements of shareholders’ equity and cash flows for the
nine-month periods ended September 30, 2008 and 2007. These condensed
consolidated financial statements are the responsibility of the Company’s
management.
We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based
on our reviews, we are not aware of any material modifications that should be
made to the condensed consolidated financial statements referred to above for
them to be in conformity with U.S. generally accepted accounting
principles.
We
have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Aetna Inc. and subsidiaries as of December 31, 2007, and the related
consolidated statements of income, shareholders’ equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 28,
2008, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2007, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/s/
KPMG LLP
Hartford,
Connecticut
October 29,
2008
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”)
OVERVIEW
We are 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. We offer 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. Our operations are conducted in three business
segments: Health Care, Group Insurance and Large Case
Pensions.
The
following MD&A provides a review of our financial condition at September 30,
2008 and December 31, 2007 and results of operations for the three and nine
months ended September 30, 2008 and 2007. This Overview should be
read in conjunction with the entire MD&A, which contains detailed
information that is important to understanding our results of operations and
financial condition, the consolidated financial statements and other data
presented herein as well as the MD&A contained in our 2007 Annual Report on
Form 10-K (our “2007 Annual Report”). This Overview is qualified in
its entirety by the full MD&A.
Summarized
Results for the Three and Nine Months Ended September 30, 2008 and
2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
Care
|
|
$ |
7,132.5 |
|
|
$ |
6,280.4 |
|
|
$ |
21,424.0 |
|
|
$ |
18,322.6 |
|
Group
Insurance
|
|
|
393.6 |
|
|
|
526.2 |
|
|
|
1,372.3 |
|
|
|
1,602.8 |
|
Large
Case Pensions
|
|
|
98.5 |
|
|
|
154.7 |
|
|
|
395.1 |
|
|
|
529.8 |
|
Total
revenue
|
|
|
7,624.6 |
|
|
|
6,961.3 |
|
|
|
23,191.4 |
|
|
|
20,455.2 |
|
Net
income
|
|
|
277.3 |
|
|
|
496.7 |
|
|
|
1,189.4 |
|
|
|
1,382.6 |
|
Operating
earnings:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
Care
|
|
|
520.0 |
|
|
|
488.6 |
|
|
|
1,435.5 |
|
|
|
1,331.3 |
|
Group
Insurance
|
|
|
47.2 |
|
|
|
38.2 |
|
|
|
121.4 |
|
|
|
108.5 |
|
Large
Case Pensions
|
|
|
8.8 |
|
|
|
9.2 |
|
|
|
27.2 |
|
|
|
26.7 |
|
Cash
flows from operations (year-to-date only)
|
|
|
|
|
|
|
|
|
|
|
1,752.4 |
|
|
|
1,406.5 |
|
(1)
|
Our
discussion of operating results for our reportable business segments is
based on operating earnings, which is a non-GAAP measure of net income
(the term “GAAP” refers to U.S. generally accepted accounting
principles). Refer to Segment Results and Use of Non-GAAP
Measures in this MD&A on page 24 for a discussion of non-GAAP
measures. Refer to pages 25, 29 and 30 for a reconciliation of
operating earnings to net income for Health Care, Group Insurance and
Large Case Pensions, respectively.
|
Our operating earnings for
the three and nine months ended September 30, 2008, compared to the
corresponding periods in 2007, reflect continued growth in our Health Care
business. The increase in our operating earnings primarily
reflects growth in revenue from increases in membership levels (refer to
Health Care membership on page 27) and premium rates for renewing membership in
2008 and solid underwriting results partially offset by lower net investment
income. We experienced membership growth in both our Insured (where
we assume all or a majority of risk for health care costs) and our
administrative services contract (“ASC”) (where the plan sponsor assumes all or
a majority of the risk for health care costs) medical products. At
September 30,
2008, we served approximately 17.7 million medical members (consisting of
approximately 34% Insured members and 66% ASC members), 14.1 million dental
members and 11.1 million pharmacy members.
Net
income for the three months ended September 30, 2008 includes after tax net
realized capital losses of $232 million, reflecting approximately $120 million
of yield-related other-than-temporary impairments (“OTTI”) and approximately $70
million of credit-related OTTI of debt securities. Refer to Net
Realized Capital Gains and Losses beginning on page 33 for additional
information.
We
continued to generate strong cash flows from operations in 2008. We
also continued our share repurchase program during the nine months ended
September 30, 2008, repurchasing approximately 38 million shares of our common
stock at a cost of approximately $1.7 billion.
Board
of Directors Update
Richard
J. Harrington was appointed to our Board of Directors (“Board”) in September
2008. Mr. Harrington is chairman of the Thomson Reuters
Foundation. He also serves on our Board’s Audit Committee and
Investment and Finance Committee. With the addition of Mr.
Harrington, the Board consists of thirteen directors.
Management
Update
Rajan
Parmeswar, Vice President, Controller and Chief Accounting Officer, joined Aetna
in August 2008 and succeeded Ronald M. Olejniczak, who retired in July
2008.
Gery
J. Barry, Chief Strategy Officer, joined Aetna in August 2008.
Segment
Results and Use of Non-GAAP Measures in this Document
The
discussion of our results of operations that follows is presented based on our
reportable segments in accordance with Statement of Financial Accounting
Standards (“FAS”) No. 131 “Disclosures about Segments of an
Enterprise and Related Information,” and is consistent with our segment
disclosure included in Note 13 of the Condensed Notes to Consolidated Financial
Statements on page 17. Each segment’s discussion of results is based
on operating earnings, which is the measure reported to our Chief Executive
Officer for purposes of assessing the segment’s financial performance and making
operating decisions, such as allocating resources to the segment. Our
operations are conducted in three business segments: Health Care,
Group Insurance and Large Case Pensions.
Our
discussion of the results of operations of each business segment is based on
operating earnings, which exclude realized capital gains and losses as well as
other items, if any, from net income reported in accordance with
GAAP. We believe excluding realized capital gains and losses from net
income to arrive at operating earnings provides more useful information about
our underlying business performance. Net realized capital gains and
losses arise from various types of transactions, primarily in the course of
managing a portfolio of assets that support the payment of liabilities; however
these transactions do not directly relate to the underwriting or servicing of
products for our customers and are not directly related to the core performance
of our business operations. We also may exclude other items that do
not relate to the ordinary course of our business from net income to arrive at
operating earnings. In each segment discussion below, we present a
table that reconciles operating earnings to net income reported in accordance
with GAAP. Each table details the net realized capital gains and
losses and any other items excluded from net income, and the footnotes to each
table describe the nature of each other item and why we believe it is
appropriate to exclude that item from net income in calculating operating
earnings.
HEALTH
CARE
Health
Care consists of medical, pharmacy benefits management, dental and vision plans
offered on both an Insured basis and an ASC basis. Medical products
include point-of-service (“POS”), preferred provider organization (“PPO”),
health maintenance organization and indemnity benefit plans. Medical
products also include health savings accounts (“HSAs”) and Aetna HealthFund®,
consumer-directed health plans that combine traditional POS or PPO and/or dental
coverage, subject to a deductible, with an accumulating benefit
account. We also offer Medicare and Medicaid products and services
and specialty products, such as medical management and data analytics services,
behavioral health plans and stop loss insurance, as well as products that
provide access to our provider network in select markets.
Operating
Summary for the Three and Nine Months Ended September 30, 2008 and
2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerical
(1)
|
|
$ |
5,086.6 |
|
|
$ |
4,720.9 |
|
|
$ |
14,924.4 |
|
|
$ |
13,831.1 |
|
Medicare
|
|
|
1,209.9 |
|
|
|
634.8 |
|
|
|
3,631.7 |
|
|
|
1,964.0 |
|
Medicaid
|
|
|
154.3 |
|
|
|
89.7 |
|
|
|
437.1 |
|
|
|
121.6 |
|
Total
premiums
|
|
|
6,450.8 |
|
|
|
5,445.4 |
|
|
|
18,993.2 |
|
|
|
15,916.7 |
|
Fees
and other revenue
|
|
|
806.9 |
|
|
|
747.7 |
|
|
|
2,406.3 |
|
|
|
2,160.8 |
|
Net
investment income
|
|
|
88.5 |
|
|
|
90.9 |
|
|
|
269.9 |
|
|
|
278.3 |
|
Net
realized capital losses
|
|
|
(213.7 |
) |
|
|
(3.6 |
) |
|
|
(245.4 |
) |
|
|
(33.2 |
) |
Total
revenue
|
|
|
7,132.5 |
|
|
|
6,280.4 |
|
|
|
21,424.0 |
|
|
|
18,322.6 |
|
Health
care costs (2)
|
|
|
5,216.6 |
|
|
|
4,323.1 |
|
|
|
15,456.1 |
|
|
|
12,814.1 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
259.0 |
|
|
|
243.1 |
|
|
|
789.6 |
|
|
|
722.6 |
|
General
and administrative expenses (3)
|
|
|
1,041.1 |
|
|
|
937.1 |
|
|
|
3,124.0 |
|
|
|
2,693.4 |
|
Total
operating expenses
|
|
|
1,300.1 |
|
|
|
1,180.2 |
|
|
|
3,913.6 |
|
|
|
3,416.0 |
|
Amortization
of other acquired intangible assets
|
|
|
23.7 |
|
|
|
24.2 |
|
|
|
75.3 |
|
|
|
64.4 |
|
Total
benefits and expenses
|
|
|
6,540.4 |
|
|
|
5,527.5 |
|
|
|
19,445.0 |
|
|
|
16,294.5 |
|
Income
before income taxes
|
|
|
592.1 |
|
|
|
752.9 |
|
|
|
1,979.0 |
|
|
|
2,028.1 |
|
Income
taxes
|
|
|
211.0 |
|
|
|
266.6 |
|
|
|
703.0 |
|
|
|
718.3 |
|
Net
income
|
|
$ |
381.1 |
|
|
$ |
486.3 |
|
|
$ |
1,276.0 |
|
|
$ |
1,309.8 |
|
(1)
|
Commercial
includes all medical, dental and other Insured products except Medicare
and Medicaid.
|
(2)
|
The
percentage of health care costs related to capitated arrangements with
primary care physicians (a fee arrangement where we pay providers a
monthly fixed fee for each member, regardless of the medical services
provided to the member) was 5.2% and 5.0% for the three and nine months
ended September 30, 2008, respectively, compared to 5.6% for both of the
corresponding periods in 2007.
|
(3)
|
Includes
salaries and related benefit expenses of $613.4 million and $1.8 billion
for the three and nine months ended September 30, 2008, respectively, and
$550.3 million and $1.6 billion, respectively, for the corresponding
periods in 2007.
|
The
table presented below reconciles operating earnings to net income reported in
accordance with GAAP for the three and nine months ended September 30, 2008 and
2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
381.1 |
|
|
$ |
486.3 |
|
|
$ |
1,276.0 |
|
|
$ |
1,309.8 |
|
Net
realized capital losses
|
|
|
138.9 |
|
|
|
2.3 |
|
|
|
159.5 |
|
|
|
21.5 |
|
Operating
earnings
|
|
$ |
520.0 |
|
|
$ |
488.6 |
|
|
$ |
1,435.5 |
|
|
$ |
1,331.3 |
|
Operating
earnings for the three and nine months ended September 30, 2008 when compared to
the corresponding periods in 2007 reflect growth in premiums, fees and other
revenue and solid underwriting results as well as continued operating expense
efficiencies (operating expenses divided by total revenue). The
growth in premiums and fees and other revenue resulted from increases in
membership levels from current and new customers (refer to Membership on page
27) as well as premium rate increases for renewing membership.
We
calculate our medical benefit ratio (“MBR”) by dividing health care costs by
premiums. For the three and nine months ended September 30, 2008 and
2007, our MBRs were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Commercial
|
|
|
80.3 |
% |
|
|
78.6 |
% |
|
|
80.2 |
% |
|
|
79.5 |
% |
Medicare
|
|
|
83.0 |
% |
|
|
84.4 |
% |
|
|
85.3 |
% |
|
|
86.9 |
% |
Medicaid
|
|
|
81.1 |
% |
|
|
85.5 |
% |
|
|
87.7 |
% |
|
|
87.4 |
% |
Total
|
|
|
80.9 |
% |
|
|
79.4 |
% |
|
|
81.4 |
% |
|
|
80.5 |
% |
Refer
to our discussion of Commercial, Medicare and Medicaid results that follows for
an explanation of the changes in our MBR.
Our
Commercial products continued to grow in 2008
Commercial
premiums increased approximately $366 million and $1.1 billion for the three and
nine months ended September 30, 2008, respectively, compared to the
corresponding periods in 2007. This increase reflects premium rate
increases on renewing business and an increase in membership
levels.
Our
Commercial MBR was 80.3% and 80.2% for the three and nine months ended September
30, 2008, respectively, and 78.6% and 79.5%, respectively, for the corresponding
periods in 2007. For the three months ended September 30, 2008, we
had approximately $56 million of unfavorable development of prior period health
care cost estimates. This development was driven by unusually high paid
claims activity in the third quarter primarily related to second quarter 2008
dates of service. We had no significant development of prior period health
care cost estimates for the nine months ended September 30, 2008 or the three or
nine months ended September 30, 2007. Taking this development into
account, the Commercial MBR for the three months ended September 30, 2008 was
slightly higher than the corresponding period in 2007, reflecting a percentage
increase in our per member health care costs that slightly outpaced the
percentage increase in per member premiums. The increase in per
member health care costs was driven primarily by increases in costs related to
physician services, emergency room and ancillary services as well as moderate
increases in hospital inpatient and outpatient costs. Refer to Critical
Accounting Estimates – Health Care Costs Payable in our 2007 Annual Report for a
discussion of Health Care Costs Payable.
Medicare
results for 2008 reflect growth from 2007
Medicare
premiums increased approximately $575 million and $1.7 billion for the three and
nine months ended September 30, 2008, respectively, compared to the
corresponding periods in 2007. This increase primarily reflects
growth in our group private-fee-for-service Medicare (“PFFS”) plans, including
the conversion of a large customer’s membership from a Commercial ASC plan to a
Medicare Insured plan, and increases in premiums from our Medicare
products as a result of higher membership levels, rate increases from CMS and
premium rate increases.
The
Medicare MBRs for the three and nine months ended September 30, 2008 were 83.0%
and 85.3%, respectively, compared to 84.4% and 86.9%, respectively, for the corresponding periods in
2007. For the three months ended September 30, 2008 and 2007, we had
approximately $26 million and $24 million, respectively, of favorable
development of prior period health care cost estimates, primarily related to
claims incurred in the six months ended June 30, 2008 and 2007,
respectively. We had no significant development of prior period
health care cost estimates for the nine months ended September 30, 2008 or
2007. The decrease in the Medicare MBRs for the three and nine months
ended September 30, 2008 reflects a percentage increase in our per member
premiums that outpaced the percentage increase in per member health care
costs.
Medicaid
results for 2008 reflect growth from the Schaller Anderson, Incorporated
(“Schaller Anderson”) acquisition.
Medicaid
premiums increased approximately $65 million and $316 million for the three and
nine months ended September 30, 2008, respectively, compared to the
corresponding periods in 2007. This increase primarily reflects an
increase in premiums as a result of our acquisition of Schaller Anderson in July
2007. The Medicaid MBRs were 81.1% and 87.7% for the three and nine
months ended September 30, 2008, respectively,
compared to 85.5% and 87.4%, respectively,
for the corresponding periods in 2007. For the three months
ended September 30, 2008, we had approximately $7 million of favorable
development of prior period health care cost estimates primarily related to a
large Insured contract. We had no significant development of Medicaid
prior period health care cost estimates for the three months ended September 30,
2007 or the nine months ended September 30, 2008 or
2007.
Other
Sources of Revenue
Fees
and other revenue increased approximately $59 million and $246 million for the
three and nine months ended September 30, 2008, respectively, compared to the
corresponding periods in 2007, reflecting revenue from our acquisitions of
Schaller Anderson and Goodhealth Worldwide (Bermuda) Limited (“Goodhealth”), as
well as growth in ASC membership.
Net
realized capital losses for the three and nine months ended September 30, 2008
were due primarily to other-than-temporary impairments of debt securities (refer
to Investments – Capital Gains and Losses on page 33 for additional
information). Net realized capital losses for the three months ended September
30, 2008 were also due to net losses on the sale of debt
securities. Net realized capital losses for the three and nine months
ended September 30, 2007 were due primarily to other-than-temporary impairments
of debt securities partially offset by net gains on the sale of debt
securities.
Membership
Health
Care’s membership at September 30, 2008 and 2007 was as
follows:
|
|
2008
|
|
|
2007
|
(Thousands)
|
|
Insured
|
|
|
ASC
|
|
|
Total
|
|
|
Insured
|
|
ASC
|
|
Total
|
Medical:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
(1)
|
|
|
5,525 |
|
|
|
10,931 |
|
|
|
16,456 |
|
|
|
5,313 |
|
|
10,321 |
|
|
15,634 |
Medicare
|
|
|
365 |
|
|
|
- |
|
|
|
365 |
|
|
|
191 |
|
|
15 |
(2) |
|
206 |
Medicaid
(1)
|
|
|
180 |
|
|
|
667 |
|
|
|
847 |
|
|
|
164 |
|
|
609 |
|
|
773 |
Total
Medical Membership
|
|
|
6,070 |
|
|
|
11,598 |
|
|
|
17,668 |
|
|
|
5,668 |
|
|
10,945 |
|
|
16,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-Directed
Health Plans (3)
|
|
|
|
|
|
|
|
|
|
|
1,412 |
|
|
|
|
|
|
|
|
|
980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
(1)
|
|
|
4,995 |
|
|
|
7,543 |
|
|
|
12,538 |
|
|
|
4,996 |
|
|
7,270 |
|
|
12,266 |
Medicare
and Medicaid (1)
|
|
|
226 |
|
|
|
402 |
|
|
|
628 |
|
|
|
188 |
|
|
392 |
|
|
580 |
Network
Access
(4)
|
|
|
- |
|
|
|
951 |
|
|
|
951 |
|
|
|
- |
|
|
838 |
|
|
838 |
Total
Dental Membership
|
|
|
5,221 |
|
|
|
8,896 |
|
|
|
14,117 |
|
|
|
5,184 |
|
|
8,500 |
|
|
13,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmacy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
(1)
|
|
|
|
|
|
|
|
|
|
|
9,809 |
|
|
|
|
|
|
|
|
|
9,549 |
Medicare
PDP (stand-alone)
|
|
|
|
|
|
|
|
|
|
|
372 |
|
|
|
|
|
|
|
|
|
309 |
Medicare
Advantage PDP
|
|
|
|
|
|
|
|
|
|
|
193 |
|
|
|
|
|
|
|
|
|
150 |
Medicaid
(1)
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
|
|
|
|
|
|
21 |
Total
Pharmacy Benefit Management Services
|
|
|
|
|
|
|
|
|
|
|
10,397 |
|
|
|
|
|
|
|
|
|
10,029 |
Mail
Order (5)
|
|
|
|
|
|
|
|
|
|
|
657 |
|
|
|
|
|
|
|
|
|
640 |
Total
Pharmacy Membership
|
|
|
|
|
|
|
|
|
|
|
11,054 |
|
|
|
|
|
|
|
|
|
10,669 |
(1)
|
Approximately
26,000 State Children’s Health Insurance Program (“SCHIP”) medical members
and 21,000 of both SCHIP pharmacy and dental members at September 30, 2007
were reclassified from Commercial to Medicaid. Additionally,
dental membership at September 30, 2007 was revised to include Schaller
Anderson (Medicaid) membership to conform with the 2008
presentation.
|
(2)
|
Represents
members who participated in a CMS pilot program under which we provided
disease and care management services to selected Medicare fee-for-service
beneficiaries in exchange for a fee. This program terminated in
September 2008.
|
(3)
|
Represents
members in consumer-directed health plans also included in Commercial
medical membership above.
|
(4)
|
Represents
members in products that allow these members access to our dental provider
network for a nominal fee.
|
(5)
|
Represents
members who purchased medications through our mail order pharmacy
operations during the third quarter of 2008 and 2007, respectively, and
are included in pharmacy membership
above.
|
Total
medical, dental and pharmacy membership at September 30, 2008 increased compared
to September 30, 2007. The increase in medical membership was
primarily due to growth in our Commercial and Medicare
products. Growth in Commercial membership was driven by membership
growth within existing plan sponsors and new customers, net of
lapses. Growth in Medicare membership was primarily due to growth in
our group PFFS plans, including the conversion of a large customer from a
Commercial ASC plan to a Medicare Insured plan.
Total
dental membership increased in 2008 primarily due to membership growth from both
new and current customers.
Pharmacy
membership increased in 2008 primarily due to growth in our pharmacy benefit
management services and mail order operations. Our pharmacy benefit
management services growth was due in part to an increase in Commercial pharmacy
membership as well as Medicare Part D prescription drug program
membership. Commercial pharmacy membership increased reflecting
strong cross selling success. Mail order operations reflected an increase in
member utilization during this time period.
GROUP
INSURANCE
Group
Insurance primarily includes group life insurance products offered on an Insured
basis, including basic group term life, group universal life, supplemental or
voluntary programs and accidental death and dismemberment
coverage. Group Insurance also includes (i) group disability products
offered to employers on both an Insured and an ASC basis, which consist
primarily of short-term and long-term disability insurance (and products which
combine both), (ii) absence management services offered to employers, which
include short-term and long-term disability administration and leave management
and (iii) long-term care products that were offered primarily on an Insured
basis, which provide benefits covering the cost of care in private home
settings, adult day care, assisted living or nursing facilities. We
no longer solicit or accept new long-term care customers, and we are working
with our customers on an orderly transition of this product to other
carriers.
Operating
Summary for the Three and Nine Months Ended September 30, 2008 and
2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
$ |
267.4 |
|
|
$ |
299.2 |
|
|
$ |
796.6 |
|
|
$ |
901.0 |
|
Disability
|
|
|
135.3 |
|
|
|
122.3 |
|
|
|
399.8 |
|
|
|
359.0 |
|
Long-term
care
|
|
|
21.5 |
|
|
|
21.6 |
|
|
|
65.5 |
|
|
|
70.0 |
|
Total
premiums
|
|
|
424.2 |
|
|
|
443.1 |
|
|
|
1,261.9 |
|
|
|
1,330.0 |
|
Fees
and other revenue
|
|
|
24.3 |
|
|
|
25.6 |
|
|
|
73.4 |
|
|
|
75.6 |
|
Net
investment income
|
|
|
62.7 |
|
|
|
68.4 |
|
|
|
192.2 |
|
|
|
228.7 |
|
Net
realized capital losses
|
|
|
(117.6 |
) |
|
|
(10.9 |
) |
|
|
(155.2 |
) |
|
|
(31.5 |
) |
Total
revenue
|
|
|
393.6 |
|
|
|
526.2 |
|
|
|
1,372.3 |
|
|
|
1,602.8 |
|
Current
and future benefits
|
|
|
355.3 |
|
|
|
396.7 |
|
|
|
1,087.2 |
|
|
|
1,220.3 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
23.2 |
|
|
|
24.0 |
|
|
|
72.0 |
|
|
|
71.1 |
|
General
and administrative expenses (1)
|
|
|
65.6 |
|
|
|
63.3 |
|
|
|
195.0 |
|
|
|
191.8 |
|
Allowance
on reinsurance recoverable
|
|
|
42.2 |
|
|
|
- |
|
|
|
42.2 |
|
|
|
- |
|
Total
operating expenses
|
|
|
131.0 |
|
|
|
87.3 |
|
|
|
309.2 |
|
|
|
262.9 |
|
Amortization
of other acquired intangible assets
|
|
|
1.7 |
|
|
|
1.7 |
|
|
|
5.2 |
|
|
|
5.1 |
|
Total
benefits and expenses
|
|
|
488.0 |
|
|
|
485.7 |
|
|
|
1,401.6 |
|
|
|
1,488.3 |
|
(Loss)
income before income taxes
|
|
|
(94.4 |
) |
|
|
40.5 |
|
|
|
(29.3 |
) |
|
|
114.5 |
|
Income
taxes
|
|
|
(37.7 |
) |
|
|
9.4 |
|
|
|
(22.4 |
) |
|
|
26.5 |
|
Net
(loss) income
|
|
$ |
(56.7 |
) |
|
$ |
31.1 |
|
|
$ |
(6.9 |
) |
|
$ |
88.0 |
|
(1)
|
Includes
salaries and related benefit expenses of $43.9 million and $128.3 million
for the three and nine months ended September 30, 2008, respectively, and
$46.2 million and $112.2 million, respectively, for the corresponding
periods in 2007.
|
The
table presented below reconciles operating earnings to net income reported in
accordance with GAAP for the three and nine months ended September 30, 2008 and
2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions,
after tax)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
(loss) income
|
|
$ |
(56.7 |
) |
|
$ |
31.1 |
|
|
$ |
(6.9 |
) |
|
$ |
88.0 |
|
Net
realized capital losses
|
|
|
76.5 |
|
|
|
7.1 |
|
|
|
100.9 |
|
|
|
20.5 |
|
Allowance
on reinsurance recoverable
(1)
|
|
|
27.4 |
|
|
|
- |
|
|
|
27.4 |
|
|
|
- |
|
Operating
earnings
|
|
$ |
47.2 |
|
|
$ |
38.2 |
|
|
$ |
121.4 |
|
|
$ |
108.5 |
|
(1)
|
As
a result of the liquidation proceedings of Lehman Re Ltd. (“Lehman Re”), a
subsidiary of Lehman Brothers Holdings Inc., we recorded an allowance
against our reinsurance recoverable from Lehman Re of $27.4 million ($42.2
million pretax) in the three and nine months ended September 30,
2008. This reinsurance is on a closed block of paid-up group
whole life insurance business. We believe this charge neither
relates to the ordinary course of our business nor reflects our underlying
business performance, and therefore, we have excluded it from operating
earnings for the three and nine months ended September 30, 2008.
|
Operating
earnings for the three months ended September 30, 2008 increased compared to the
corresponding period in 2007 reflecting a higher underwriting margin due to
favorable life and long-term care results partially offset by lower net
investment income. Operating earnings for the nine months ended
September 30, 2008 increased compared to the corresponding period in 2007
reflecting a higher underwriting margin due to favorable disability and
long-term care results partially offset by lower net investment
income. Net investment income for the three and nine months ended
September 30, 2008 decreased compared to the corresponding periods in 2007
primarily due to lower income from alternative investments. Life
premiums for the three and nine months ended September 30, 2008 reflect the
lapse of several large customers, which had a nominal impact on operating
earnings.
In
the three and nine months ended September 30, 2008, we recorded an allowance
against our reinsurance recoverable from Lehman Re of $42 million pretax
in operating expenses. The reinsurance recoverable results from
a 1999 transaction in which Lehman Re reinsured a closed block of paid-up group
whole life insurance policies we issued between 1941 and 1999. In
September 2008, we took possession of assets supporting the reinsurance
recoverable, which previously were held as collateral in a trust. In
September 2008, Lehman Re commenced proceedings in Bermuda to liquidate
itself. We intend to pursue our claims in Lehman Re’s liquidation
proceedings.
The
group benefit ratios were 83.8% and 86.2% for the three and nine months ended
September 30, 2008, respectively, compared to 89.5% and 91.8%, respectively, for
the corresponding periods in 2007. The decrease in the group benefit
ratio for the three months ended September 30, 2008 compared to the
corresponding period in 2007 was primarily due to favorable life and long-term
care experience. The decrease in the group benefit ratio for the nine
months ended September 30, 2008 compared to the corresponding period in 2007 was
primarily due to favorable disability and long-term care
experience.
Net
realized capital losses for the three and nine months ended September 30, 2008
were due primarily to other-than-temporary impairments of debt securities (refer
to Investments – Capital Gains and Losses on page 33 for additional information)
and net losses from the sale of debt securities. Net realized capital
losses for the three and nine months ended September 30, 2007 were due primarily
to losses on other-than-temporary impairments of debt securities partially
offset by gains on futures contracts.
LARGE
CASE PENSIONS
Large
Case Pensions manages a variety of retirement products (including pension and
annuity products) primarily for tax qualified pension plans. These
products provide a variety of funding and benefit payment distribution options
and other services. The Large Case Pensions segment includes certain
discontinued products.
Operating
Summary for the Three and Nine Months Ended September 30, 2008 and
2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Premiums
|
|
$ |
42.5 |
|
|
$ |
51.4 |
|
|
$ |
153.3 |
|
|
$ |
163.1 |
|
Net
investment income
|
|
|
78.6 |
|
|
|
102.8 |
|
|
|
269.6 |
|
|
|
357.9 |
|
Other
revenue
|
|
|
2.9 |
|
|
|
2.6 |
|
|
|
9.0 |
|
|
|
8.5 |
|
Net
realized capital (losses) gains
|
|
|
(25.5 |
) |
|
|
(2.1 |
) |
|
|
(36.8 |
) |
|
|
.3 |
|
Total
revenue
|
|
|
98.5 |
|
|
|
154.7 |
|
|
|
395.1 |
|
|
|
529.8 |
|
Current
and future benefits
|
|
|
109.4 |
|
|
|
140.9 |
|
|
|
387.2 |
|
|
|
484.4 |
|
General
and administrative expenses
(1)
|
|
|
3.6 |
|
|
|
3.9 |
|
|
|
10.8 |
|
|
|
11.4 |
|
Reduction
of reserve for anticipated future losses on discontinued
products
|
|
|
- |
|
|
|
- |
|
|
|
(43.8 |
) |
|
|
(64.3 |
) |
Total
benefits and expenses
|
|
|
113.0 |
|
|
|
144.8 |
|
|
|
354.2 |
|
|
|
431.5 |
|
(Loss)
income before income taxes
|
|
|
(14.5 |
) |
|
|
9.9 |
|
|
|
40.9 |
|
|
|
98.3 |
|
Income
taxes
|
|
|
(6.7 |
) |
|
|
2.0 |
|
|
|
9.1 |
|
|
|
29.6 |
|
Net
(loss) income
|
|
$ |
(7.8 |
) |
|
$ |
7.9 |
|
|
$ |
31.8 |
|
|
$ |
68.7 |
|
(1)
(1)
|
Includes
salaries and related benefit expenses of $2.8 million and $8.2 million for
the three and nine months ended September 30, 2008, respectively, and $2.9
million and $8.7 million, respectively, for the corresponding periods in
2007.
|
At
September 30, 2008 and 2007, Large Case Pensions assets under management
consisted of the following:
(Millions)
|
|
|
2008
|
2007
|
Assets
under management: (1)
|
|
|
|
|
|
|
Fully
guaranteed discontinued products
|
|
$ |
3,966.6
|
|
$ |
4,256.1
|
Experience-rated
|
|
|
4,245.9
|
|
|
4,574.4
|
Non-guaranteed
(2)
|
|
|
2,713.4
|
|
|
15,790.1
|
Total
assets under management
|
|
$ |
10,925.9
|
|
$ |
24,620.6
|
(1)
|
Excludes
net unrealized capital (losses) gains of $(198.9) million and $99.2
million at September 30, 2008 and 2007, respectively.
|
(2)
|
In
2008, approximately $12.4 billion of our mortgage loan and real estate
Separate Account assets transitioned out of our business. Refer
to Note 15 of Condensed Notes to Consolidated Financial Statements on page
21 for additional information.
|
The
table presented below reconciles operating earnings to net income reported in
accordance with GAAP for the three and nine months ended September 30, 2008 and
2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
(loss) income
|
|
$ |
(7.8 |
) |
|
$ |
7.9 |
|
|
$ |
31.8 |
|
|
$ |
68.7 |
|
Reduction
of reserve for anticipated future losses on discontinued products (1)
|
|
|
- |
|
|
|
- |
|
|
|
(28.5 |
) |
|
|
(41.8 |
) |
Net
realized capital losses (gains)
|
|
|
16.6 |
|
|
|
1.3 |
|
|
|
23.9 |
|
|
|
(.2 |
) |
Operating
earnings
|
|
$ |
8.8 |
|
|
$ |
9.2 |
|
|
$ |
27.2 |
|
|
$ |
26.7 |
|
(1)
|
In
1993, we discontinued the sale of our fully guaranteed large case pension
products and established a reserve for anticipated future losses on these
products, which we review quarterly. Changes in this reserve
are recognized when deemed appropriate. In the nine months
ended September 30, 2008 and 2007, we reduced the reserve for anticipated
future losses on discontinued products by $28.5 million ($43.8 million
pretax) and $41.8 million ($64.3 million pretax),
respectively. We believe excluding any changes to the reserve
for anticipated future losses on discontinued products provides more
useful information as to our continuing products and is consistent with
the treatment of the results of operations of these discontinued products,
which are credited or charged to the reserve and do not affect our results
of operations.
|
The
reduction of the reserve for anticipated future losses on discontinued products
for the nine months ended September 30, 2008 was primarily due to favorable
mortality and retirement experience compared to assumptions we previously made
in estimating the reserve. The reduction of this reserve for the nine
months ended September 30, 2007 was primarily due to favorable investment
performance and favorable mortality and retirement experience compared to
assumptions we previously made in estimating the reserve.
General
account assets supporting experience-rated products (where the contract holder,
not us, assumes investment and other risks subject to, among other things,
certain minimum guarantees) may be subject to contract holder or participant
withdrawals. Experience-rated contract holder and participant
withdrawals for the three and nine months ended September 30, 2008 and 2007 were
as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Scheduled
contract maturities and benefit payments (1)
|
|
$ |
73.2 |
|
|
$ |
85.9 |
|
|
$ |
242.9 |
|
|
$ |
262.6 |
|
Contract
holder withdrawals other than scheduled contract
maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
benefit payments
|
|
|
6.4 |
|
|
|
15.3 |
|
|
|
29.0 |
|
|
|
29.7 |
|
Participant-directed
withdrawals
|
|
|
1.2 |
|
|
|
1.3 |
|
|
|
2.4 |
|
|
|
3.7 |
|
(1)
(1)
|
Includes
payments made upon contract maturity and other amounts distributed in
accordance with contract schedules.
|
Discontinued
Products
We
discontinued the sale of our fully guaranteed large case pension products
(single-premium annuities (“SPAs”) and guaranteed investment contracts) in
1993. We established a reserve for anticipated future losses on these
products based on the present value of the difference between the expected cash
flows from the assets supporting these products and the cash flows expected to
be required to meet our obligations under these products.
Results
of operations of discontinued products, including net realized capital gains
(losses), are credited (charged) to the reserve for anticipated future
losses. Our results of operations would be adversely affected to the
extent that future losses on these products are greater than anticipated and
favorably affected to the extent future losses are less than
anticipated.
The
factors contributing to changes in the reserve for anticipated future losses
are: operating income or loss (including investment income and mortality and
retirement gains or losses) and realized capital gains or
losses. Operating income or loss is equal to revenue less
expenses. Mortality and retirement gains or losses reflect our
experience related to SPAs. A mortality gain (loss) occurs when an
annuitant or a beneficiary dies sooner (later) than expected. A
retirement gain (loss) occurs when an annuitant retires later (earlier) than
expected.
The
results of discontinued products for the three and nine months ended September
30, 2008 and 2007 were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Interest
deficit (1)
|
|
$ |
(24.9 |
) |
|
$ |
(12.5 |
) |
|
$ |
(54.1 |
) |
|
$ |
(7.6 |
) |
Net
realized capital (losses) gains
|
|
|
(58.4 |
) |
|
|
4.6 |
|
|
|
(65.4 |
) |
|
|
22.6 |
|
Interest
earned on receivable from continuing products
|
|
|
4.2 |
|
|
|
4.3 |
|
|
|
13.0 |
|
|
|
13.3 |
|
Other,
net
|
|
|
4.4 |
|
|
|
1.9 |
|
|
|
15.9 |
|
|
|
12.4 |
|
Results
of discontinued products, after tax
|
|
$ |
(74.7 |
) |
|
$ |
(1.7 |
) |
|
$ |
(90.6 |
) |
|
$ |
40.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of discontinued products, pretax
|
|
$ |
(119.1 |
) |
|
$ |
(6.5 |
) |
|
$ |
(151.7 |
) |
|
$ |
51.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
realized capital losses from sales and
other-than-temporary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impairments
of debt securities, after tax (included above)
|
|
$ |
(49.8 |
) |
|
$ |
(1.2 |
) |
|
$ |
(66.6 |
) |
|
$ |
(5.5 |
) |
(1)
|
The
interest deficit is the difference between earnings on invested assets and
interest credited to the reserve.
|
The
interest deficit for the three and nine months ended September 30, 2008
increased compared to the corresponding periods in 2007 primarily due to lower
net investment income.
Net
realized capital losses for the three and nine months ended September 30, 2008
were due primarily to other-than-temporary impairments of debt securities (refer
to Investments – Capital Gains and Losses beginning on page 33 for additional
information) and derivative losses partially offset by net gains on the sale of
equity securities. Additionally, net realized capital losses for the
three months ended September 30, 2008 were also due to net losses on the sale of
debt securities. Net realized capital gains for the three and nine
months ended September 30, 2007 were due primarily to gains from the sale of
real estate and equity securities and net gains on the sale
of debt securities partially offset by other-than-temporary impairments of debt
securities.
The
activity in the reserve for anticipated future losses on discontinued products
for the nine months ended September 30, 2008 was as follows
(pretax):
(Millions)
|
|
|
|
Reserve
for anticipated future losses on discontinued products at December 31,
2007
|
|
$ |
1,052.3 |
|
Operating
loss
|
|
|
(62.0 |
) |
Net
realized capital losses
|
|
|
(100.7 |
) |
Mortality
and other
|
|
|
11.0 |
|
Tax
benefits
|
|
|
7.9 |
|
Reserve
reduction
|
|
|
(43.8 |
) |
Reserve
for anticipated future losses on discontinued products at September 30,
2008
|
|
$ |
864.7 |
|
Management
reviews the adequacy of the discontinued products reserve quarterly and, as a
result, the reserve was reduced by $44 million ($29 million after tax) and $64
million ($42 million after tax) in the nine months ended September 30, 2008 and
2007, respectively. The 2008 reserve reduction was primarily due to
favorable mortality and retirement experience compared to assumptions we
previously made in estimating the reserve. The 2007 reserve reduction
was primarily due to favorable investment performance and favorable mortality
and retirement experience compared to assumptions we previously made in
estimating the reserve. The current reserve reflects management’s
best estimate of anticipated future losses.
Refer
to Note 14 of Condensed Notes to Consolidated Financial Statements beginning on
page 17 for additional information on the assets and liabilities supporting
discontinued products at September 30, 2008 and December 31, 2007 as well as a
discussion of the reserve for anticipated future losses on discontinued
products.
INVESTMENTS
At
September 30, 2008 and December 31, 2007 our investment portfolio consisted of
the following:
|
|
September
30,
|
|
|
December
31,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
Debt
and equity securities available for sale
|
|
$ |
14,587.4 |
|
|
$ |
15,131.9 |
|
Mortgage
loans
|
|
|
1,713.0 |
|
|
|
1,512.6 |
|
Other
investments
|
|
|
1,355.9 |
|
|
|
1,247.1 |
|
Total
investments
|
|
$ |
17,656.3 |
|
|
$ |
17,891.6 |
|
The
risks associated with investments supporting experience-rated pension and
annuity products in our Large Case Pensions business are assumed by the contract
holders and not by us (subject to, among other things, certain minimum
guarantees). Anticipated future losses associated with investments
supporting discontinued fully guaranteed Large Case Pensions products are
provided for in the reserve for anticipated future losses on discontinued
products.
As
a result of the foregoing, investment risks associated with our experience-rated
and discontinued products generally do not affect our results of
operations. Our total investments supported the following products at
September 30, 2008 and December 31, 2007:
|
|
September
30,
|
|
|
December
31,
|
|
(Millions)
|
|
2008
|
|
|
2007
|
|
Supporting
experience-rated products
|
|
$ |
1,627.5 |
|
|
$ |
1,854.9 |
|
Supporting
discontinued products
|
|
|
3,749.6 |
|
|
|
4,184.3 |
|
Supporting
remaining products
|
|
|
12,279.2 |
|
|
|
11,852.4 |
|
Total
investments
|
|
$ |
17,656.3 |
|
|
$ |
17,891.6 |
|
Debt
and Equity Securities
The
debt securities in our portfolio had an average quality rating of A+ at
September 30, 2008 and at December 31, 2007, with approximately $5.0 billion and
$5.3 billion, respectively, rated AAA on each date. Total debt
securities that were rated below investment grade (that is, having a quality
rating below BBB-/Baa3) were $712 million and $791 million at September 30, 2008
and December 31, 2007, respectively (of which 20% at September 30, 2008 and 24%
at December 31, 2007 supported our discontinued and experience-rated
products).
At
September 30, 2008 and December 31, 2007, we held approximately $871 million and
$627 million, respectively, of municipal debt securities and $108 million and
$142 million, respectively, of structured product debt securities that were
guaranteed by third parties, collectively representing approximately 5% and 4%,
respectively, of our total investments. These securities had an
average credit rating of AA- at September 30, 2008 and AAA at December 31, 2007
with the guarantee. Without the guarantee, the average credit rating
of the municipal debt securities was A+ on each date. The structured
product debt securities are not rated by the rating agencies on a standalone
basis. We do not have any significant concentration of investments
with third party guarantors (either direct or indirect).
We
classify our debt and equity securities as available for sale, carrying them at
fair value on our balance sheet. Approximately 4% of our debt and
equity securities at September 30, 2008 are valued using inputs that reflect our
own assumptions (categorized as Level 3 inputs in accordance with FAS 157, “Fair Value
Measurements”). Refer to Note 11 of Condensed Notes to
Consolidated Financial Statements beginning on page 12 for additional
information on the methodologies and key assumptions we use to determine the
fair value of investments.
At
September 30, 2008 and December 31, 2007, our debt and equity securities had net
unrealized (losses) gains of $(718) million and $209 million, respectively, of
which $(203) million and $145 million, respectively, related to our
experience-rated and discontinued products. Certain of our individual
debt securities, primarily those of issuers in the financial services sector,
have higher levels of unrealized capital losses at September 30, 2008 due to
increases in credit spreads relative to interest rates on U.S. Treasury
securities in 2008, rather than unfavorable changes in the credit quality of
such securities. We have reviewed these individual debt securities
for other-than-temporary impairments (see below) and have the intent and ability
to hold these securities until market recovery. We had no material
unrealized capital losses on individual debt or equity securities at December
31, 2007.
We
regularly review our debt and equity securities to determine if a decline in
fair value below the carrying value is other-than-temporary. If we
determine a decline in fair value is other-than-temporary, the carrying value of
the security is written down, and the amount of the write down is included as a
realized capital loss in our results of operations. Accounting for
other-than-temporary impairments of our investment securities is considered a
critical accounting estimate. Refer to Critical Accounting Estimates
- Other-Than-Temporary Impairment of Investment Securities in our 2007 Annual
Report for additional information.
Net Realized Capital Gains and
Losses
Net
realized capital losses were $357 million and $437 million for the three and
nine months ended September 30, 2008, respectively, and $17 million and $64
million for the three and nine months ended September 30, 2007,
respectively. Included in net
realized capital losses were $185 million and $302 million for the three and
nine months ended September 30, 2008, respectively, and $22 million and $93
million for the three and nine months ended September 30, 2007, respectively, of
yield-related OTTI losses.
Recognizing
a yield-related OTTI loss requires significant diligence and
judgment. We carefully evaluate all relevant facts and circumstances
for each investment in our analyses. We have concluded that the
investments for which a yield-related OTTI was recognized continue to be
performing assets generating investment income to support the needs of our
businesses. However, accounting guidance requires us to assert our
intent and ability to hold such securities until market recovery to avoid loss
recognition. In order to maintain appropriate flexibility in managing
our investment portfolio, we do not make this assertion and
therefore we recorded these yield-related OTTI losses.
Yield-related
OTTI losses were primarily due to the widening of credit spreads relative to the
interest rates on U.S. Treasury securities in the three and nine months ended
September 30, 2008 and increases in the interest rates on U.S. Treasury
securities in the three and nine months ended September 30,
2007. During 2008, significant declines
in the U.S. housing market have resulted in the credit and other capital markets
experiencing volatility and limitations on the ability of companies to issue
debt or equity securities. The lack of available credit, lack of
confidence in the financial sector, increased volatility in the financial
markets and reduced business activity has resulted in credit spreads widening
during 2008, particularly during the three months ended September 30,
2008.
Included
in net realized capital losses for the three and nine months ended September 30,
2008 were credit-related OTTI losses of $103 million related to investments in
debt securities of Lehman Brothers Holdings Inc. and Washington Mutual,
Inc. We had no other individually material realized capital losses on
debt or equity securities that impacted our results of operations during the
three or nine months ended September 30, 2008 or 2007. Refer to
Critical Accounting Estimates - Other-Than-Temporary Impairments of Investment
Securities in our 2007 Annual Report for additional information.
Mortgage
Loans
Our
mortgage loan portfolio (which is primarily secured by commercial real estate)
represented 10% and 8% of our total invested assets at September 30, 2008 and
December 31, 2007, respectively. There were no specific impairment
reserves on these loans at September 30, 2008 or December 31, 2007.
Risk
Management and Market-Sensitive Instruments
We
manage interest rate risk by seeking to maintain a tight match between the
durations of our assets and liabilities where appropriate. We manage
credit risk by seeking to maintain high average quality ratings and diversified
sector exposure within our debt securities portfolio. In connection
with our investment and risk management objectives, we also use derivative
financial instruments whose market value is at least partially determined by,
among other things, levels of or changes in interest rates (short-term or
long-term), duration, prepayment rates, equity markets or credit
ratings/spreads. Our use of these derivatives is generally limited to
hedging purposes and has principally consisted of using interest rate swap
agreements, warrants, forward contracts and futures contracts. These
instruments, viewed separately, subject us to varying degrees of interest rate,
equity price and credit risk. However, when used for hedging, we
expect these instruments to reduce overall risk.
We
regularly evaluate our risk from market-sensitive instruments by examining,
among other things, levels of or changes in interest rates (short-term or
long-term), duration, prepayment rates, equity markets or credit
ratings/spreads. We also regularly evaluate the appropriateness of
investments relative to our management-approved investment guidelines (and
operate within those guidelines) and the business objectives of our
portfolios.
The
risks associated with investments supporting experience-rated pension and
annuity products in our Large Case Pensions business are assumed by those
contract holders and not by us (subject to, among other things, certain minimum
guarantees). Anticipated future losses associated with investments
supporting discontinued fully guaranteed large case pensions products are
provided for in the reserve for anticipated future losses on discontinued
products (refer to Large Case Pensions - Discontinued Products beginning on page
31).
Management
also reviews, on a quarterly basis, the impact of hypothetical net losses in our
investment portfolio on our consolidated near-term financial position, results
of operations and cash flows assuming the occurrence of certain reasonably
possible changes in market rates and prices. Based on our overall
exposure to interest rate risk and equity price risk, we believe that these
changes in market rates and prices would not materially affect our consolidated
near-term financial position, results of operations or cash flows at September
30, 2008. Refer to the MD&A in our 2007 Annual Report for a more
complete discussion of risk management and market-sensitive
instruments.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
Generally,
we meet our operating requirements by maintaining appropriate levels of
liquidity in our investment portfolio and using overall cash flows from
premiums, deposits and income received on investments. We monitor the duration
of our portfolio of debt securities (which is highly marketable) and mortgage
loans, and execute purchases and sales of these investments with the objective
of having adequate funds available to satisfy our maturing
liabilities. Overall cash flows are used primarily for claim and
benefit payments, operating expenses and share repurchases.
Presented
in the table below is a condensed statement of cash flows for the nine months
ended September 30, 2008 and 2007. We present net cash flows used for
operating activities of continuing operations and net cash flows provided by
investing activities separately for our Large Case Pensions segment because
changes in the insurance reserves for the Large Case Pensions segment (which are
reported as cash used for operating activities) are funded from the sale of
investments (which are reported as cash provided by investing
activities). Refer to the Consolidated Statements of Cash Flows on
page 4 for additional information.
(Millions)
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Health
Care and Group Insurance (including Corporate Interest)
|
|
$ |
1,932.9 |
|
|
$ |
1,683.6 |
|
Large
Case Pensions
|
|
|
(180.5 |
) |
|
|
(277.1 |
) |
Net
cash provided by operating activities
|
|
|
1,752.4 |
|
|
|
1,406.5 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Health
Care and Group Insurance
|
|
|
(1,629.2 |
) |
|
|
(833.0 |
) |
Large
Case Pensions
|
|
|
272.5 |
|
|
|
259.6 |
|
Net
cash used for investing activities
|
|
|
(1,356.7 |
) |
|
|
(573.4 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used for financing activities
|
|
|
(785.5 |
) |
|
|
(582.5 |
) |
Net
(decrease) increase in cash and cash equivalents
|
|
$ |
(389.8 |
) |
|
$ |
250.6 |
|
Cash
Flow Analysis
Cash
flows provided by operating activities for Health Care and Group Insurance were
approximately $1.9 billion in the nine months ended September 30, 2008 and $1.7
billion in the nine months ended September 30, 2007. Cash flows for
the nine months ended September 30, 2008 reflect the receipt of approximately
$127 million in premium stabilization funds from a large customer.
We
repurchased approximately 38 million shares of common stock at a cost of
approximately $1.7 billion during the nine months ended September 30, 2008 and
27 million shares of common stock at a cost of approximately $1.3 billion during
the nine months ended September 30, 2007. At September 30, 2008, the
capacity remaining under our share repurchase program was approximately $729
million. Refer to Note 9 of Condensed Notes to Consolidated Financial
Statements on page 11 for more information.
In
September 2008, we issued $500 million of ten year senior notes and used the
proceeds to repay commercial paper borrowings.
Other
Liquidity Information
On
September 26, 2008, our Board declared an annual cash dividend of $.04 per
common share payable to shareholders of record at the close of business on
November 13, 2008. The dividend will be paid on November 28,
2008. Our Board reviews our common stock dividend
annually. Among the factors considered by the Board in determining
the amount of each dividend are our results of operations and the capital
requirements, growth and other characteristics of our businesses.
We
use short-term commercial paper borrowings from time to time to address timing
differences between cash receipts and disbursements. The maximum
amount of commercial paper borrowings outstanding during the nine months ended
September 30, 2008 was $978 million.
Our
committed short-term borrowing capacity consists of a $1.5 billion revolving
credit facility which terminates in March 2013 (the “Facility”) and a one-year
credit program for certain of our subsidiaries with a borrowing capacity of up
to $45 million. The Facility also provides for the issuance of
letters of credit at our request, up to $200 million, which count as usage of
the available commitments under the Facility. The Facility permits
the aggregate commitments under the Facility to be expanded to a maximum of $2.0
billion upon our agreement with one or more financial
institutions. There were no amounts outstanding under the Facility at
any time during 2008.
Our
total debt to capital ratio (total debt divided by shareholders’ equity plus
total debt) was approximately 31% at September 30, 2008. We
continually monitor existing and alternative financing sources to support our
capital and liquidity needs, including, but not limited to, debt issuance,
preferred or common stock issuance and pledging or selling of
assets.
Refer
to Note 8 of Condensed Notes to Consolidated Financial Statements on page 11 for
additional information on our short-term and long-term debt.
After
tax interest expense was $39 million and $112 million for the three and nine
months ended September 30, 2008, respectively, compared to $29 million and $84
million, respectively, for the corresponding periods in 2007. The
increase in interest expense in 2008 was due to higher overall average long-term
debt levels as a result of our issuance of senior notes in September 2008 and
December 2007.
Other
Common Stock Transactions
On February
8,
2008, approximately 4.4 million
stock appreciation rights, approximately .2 million
restricted stock units and approximately .4 million performance stock units were
granted to certain employees. Refer to Note 9 of Condensed Notes to
Consolidated Financial Statements on page 11 for additional
information.
Ratings
At
October 28, 2008 the ratings of Aetna Inc. and Aetna Life Insurance Company
(“ALIC”) from the respective nationally recognized statistical rating
organizations (“Rating Agencies”) were as follows:
|
|
|
|
|
|
Moody's
Investors
|
|
|
Standard
|
|
|
A.M.
Best
|
|
Fitch
|
|
|
Service
|
|
|
&
Poor's
|
|
Aetna
Inc. (senior debt) (1)
|
bbb+
|
|
|
A- |
|
|
|
A3 |
|
|
|
A- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aetna
Inc. (commercial paper)
|
AMB-2
|
|
|
F1 |
|
|
|
P-2 |
|
|
|
A-2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALIC
(financial strength) (1)
|
A
|
|
AA-
|
|
|
Aa3
|
|
|
|
A |
+ |
(1)
|
The
Rating Agencies have stated that the outlook for Aetna’s senior debt and
ALIC’s financial strength is
stable.
|
CRITICAL
ACCOUNTING ESTIMATES
Refer
to Critical Accounting Estimates in our 2007 Annual Report for information on
accounting policies that we consider critical in preparing our consolidated
financial statements. These policies include significant estimates we
make using information available at the time the estimates are
made. However, these estimates could change materially if different
information or assumptions were used.
REGULATORY
ENVIRONMENT
The federal
and state governments continue to enact and seriously consider many legislative
and regulatory proposals that have or could materially impact various aspects of
the health care system. For example:
|
·
|
On
October 3, 2008, the Paul Wellstone-Pete Domenici Mental Health Parity and
Addiction Equity Act 2008 (the “Mental Health Parity Act”) was enacted
into law as part of an end of session package that included the
Emergency Economic Stabilization Act of 2008. The Mental Health
Parity Act will become effective for plan years beginning one year
after enactment and will require employers that voluntarily provide
both medical and mental health benefits to provide such benefits on the
same terms and conditions with respect to financial requirements and
treatment limitations. The Mental Health Parity Act does
not prescribe the method(s) employers and group health plans may use to
achieve this “parity”
requirement.
|
|
·
|
On
July 15, 2008, the U.S. Congress overrode the President’s veto and passed
a Medicare funding bill that reduces amounts payable to health plans that
offer Medicare Advantage plans beginning in 2010, requires health plans
that offer Medicare Advantage plans to have contracts with the providers
their members utilize beginning in 2011, and imposes new marketing
requirements for Medicare Advantage and Medicare Part D Prescription Drug
plans beginning in 2009.
|
|
·
|
On
September 30, 2008, the state of California enacted legislation requiring
health care service plans and health insurers that have rescinded an
individual policy to reinstate coverage, on a guarantee issue basis,
for the individual(s) whose information in the application for
coverage and related communications did not lead to the
rescission.
|
Refer to Regulatory Environment in our
2007 Annual Report for additional information on regulation of our
business.
FORWARD-LOOKING
INFORMATION/RISK FACTORS
The
following risk factors supplement the Forward-Looking Information/Risk Factors
portion of our 2007 Annual Report. You should read that section of
our 2007 Annual Report and the information below carefully because each of them
contains a discussion of important risk factors that could adversely affect our
business as well as the market price for our common stock.
Adverse
economic conditions in the United States and abroad can significantly and
adversely affect our businesses and profitability, and we do not expect these
conditions to improve in the near future.
Serious
concerns over inflation, energy costs, geopolitical issues, the availability and
cost of credit and other capital, the U.S. mortgage market, consumer spending, a
declining U.S. real estate market and other factors have contributed to a
slowing global economy and significantly diminished expectations for the global
economy, particularly the U.S. economy, and this is expected to continue going
forward. Our customers, medical providers and the other companies we
do business with are generally headquartered in the U.S., however many of our
largest customers are global companies with operations around the
world. As a result, adverse economic conditions in the U.S. and
abroad can significantly and adversely affect our businesses and profitability
by:
|
·
|
Leading
to reductions in force by our customers, which would reduce both our
revenues and the number of members we
serve.
|
|
·
|
Leading
our customers and potential customers, particularly those with the most
members, and state and local governments, to force us to compete more
vigorously on factors such as price and service to retain or obtain their
business.
|
|
·
|
Leading
our customers and potential customers to purchase fewer products and/or
products that generate less revenue for us than the ones they currently
purchase or otherwise would have
purchased.
|
|
·
|
Leading
our customers and potential customers, particularly smaller employers and
individuals, to forego obtaining or renewing their health and other
coverage with us.
|
|
·
|
Causing
unanticipated increases and volatility in utilization of medical and other
covered services by our members and/or increases in medical unit costs,
each of which would increase our costs and limit our ability to accurately
detect, forecast, manage and reserve for our and our self-insured
customers’ medical cost trends and future health care
costs.
|
|
·
|
Causing,
over time, inflation that could cause interest rates to increase and
thereby increase our interest expense and reduce our net income, as well
as decrease the value of the debt securities we hold in our investment
portfolio, which would reduce our net income and/or shareholders’
equity.
|
|
·
|
Weakening
the ability or perceived ability of the issuers and/or guarantors of the
debt or other securities we hold in our investment portfolio to perform
their obligations to us, which could result in defaults in those
securities or reduce the value of those securities and create net realized
capital losses for us that reduce our net
income.
|
|
·
|
Weakening
the ability of our customers, medical providers and the other companies we
do business with to perform their obligations to us or causing them not to
perform those obligations, either of which could reduce our net
income.
|
Adverse
conditions in the United States and global capital markets can significantly and
adversely affect the value of our investment portfolio, our profitability and/or
our financial position, and we do not expect these conditions to improve in the
near future.
The global
capital markets, including credit markets, have experienced extreme volatility,
uncertainty and disruption since the beginning of the third quarter of
2008. As an insurer, we have a substantial investment portfolio,
comprised particularly of debt securities of issuers located in the U.S., that
support our policy liabilities. As a result, volatility, uncertainty
and/or disruptions in the global capital markets, particularly the U.S. credit
markets, and governments’ monetary policy, particularly the easing of U.S.
monetary policy, can significantly and adversely affect the value of our
investment portfolio, our profitability and/or our financial position
by:
|
·
|
Significantly
reducing the value of the debt securities we hold in our investment
portfolio, which creates net realized capital losses that reduce our net
income and/or net unrealized capital losses that reduce our shareholders’
equity.
|
|
·
|
Reducing
interest rates on high quality short-term debt securities and thereby
materially reducing our net investment income and net
income.
|
|
·
|
Making
it more difficult to value certain of our investment securities, for
example if trading becomes less frequent, which could lead to significant
period-to-period changes in our estimates of the fair values of those
securities and cause period-to-period volatility in our net income and
shareholders’ equity.
|
|
·
|
Reducing
our ability to issue short-term debt securities at attractive interest
rates, thereby increasing our interest expense and decreasing our net
income.
|
|
·
|
Reducing
our ability to issue other
securities.
|
|
·
|
Increasing
our pension plan expense as a result of unfavorable investment performance
and the decrease in the fair value of the assets supporting our pension
obligations.
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Refer
to the information contained in MD&A – Investments beginning on page 32 for
a discussion of our exposures to market risk.
Item
4.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures, which are designed to ensure that
information that we are required to disclose in the reports we file or submit
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
An
evaluation of the effectiveness of our disclosure controls and procedures as of
September 30, 2008 was conducted under the supervision and with the
participation of our Chief Executive Officer and Chief Financial
Officer. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures as of September 30, 2008 were effective and designed to ensure that
material information relating to Aetna Inc. and its consolidated subsidiaries
would be made known to the Chief Executive Officer and Chief Financial Officer
by others within those entities, particularly during the periods when periodic
reports under the Exchange Act are being prepared. Refer to the
Certifications by our Chief Executive Officer and Chief Financial Officer filed
as Exhibits 31.1 and 31.2 to this report.
Changes
in Internal Control over Financial Reporting
There
has been no change in our internal control over financial reporting, identified
in connection with the evaluation of such control, that occurred during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
Part
II.
|
Other
Information
|
Item
1.
|
Legal
Proceedings
|
The
information contained in Note 12 of Condensed Notes to Consolidated Financial
Statements, which begins on page 14 is incorporated herein by
reference.
The
information contained under the heading “FORWARD-LOOKING INFORMATION/RISK
FACTORS” in the MD&A on page 37 is incorporated herein by
reference.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
The
following table provides information about our monthly share repurchases for the
three months ended September 30, 2008:
Issuer
Purchases Of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Number of
|
|
|
Approximate
Dollar
|
|
|
|
|
|
|
|
|
|
Shares
Purchased
|
|
|
Value
of Shares
|
|
|
|
|
|
|
|
|
|
as
Part of Publicly
|
|
|
That
May Yet Be
|
|
|
|
Total
Number of
|
|
|
Average
Price
|
|
|
Announced
|
|
|
Purchased
Under the
|
|
(Millions,
except per share amounts)
|
|
Shares
Purchased
|
|
|
Paid
Per Share
|
|
|
Plans
or Programs
|
|
|
Plans
or Programs
|
|
July 1,
2008 - July 31, 2008
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
$ |
1,201.9 |
|
August
1, 2008 - August 31, 2008
|
|
|
7.3 |
|
|
|
42.91 |
|
|
|
7.3 |
|
|
|
888.6 |
|
September
1, 2008 - September 30, 2008
|
|
|
3.8 |
|
|
|
42.23 |
|
|
|
3.8 |
|
|
|
729.1 |
|
Total
|
|
|
11.1 |
|
|
$ |
42.68 |
|
|
|
11.1 |
|
|
|
N/A |
|
On
each of February 29, 2008 and June 27, 2008, we announced that our Board
authorized a share repurchase program for the repurchase of up to $750 million
of our common stock. During the three months ended September 30,
2008, we repurchased approximately 11 million shares of common stock at a cost
of approximately $473 million, completing the February 29, 2008 authorization
and utilizing a portion of the June 27, 2008 authorization. At
September 30, 2008, we had remaining authorization to repurchase an aggregate of
up to approximately $729 million of common stock remaining under the June 27,
2008 Board authorization.
Exhibits
to this Form 10-Q are as follows:
11
|
Statements
re: computation of per share earnings
|
|
|
11.1
|
Computation
of per share earnings is incorporated herein by reference to Note 3 of
Condensed Notes to Consolidated Financial Statements which begins on page
6 in this Form 10-Q.
|
|
|
12
|
Statements
re: computation of ratios
|
|
|
12.1
|
Computation
of ratio of earnings to fixed charges.
|
|
|
15
|
Letter
re: unaudited interim financial information
|
|
|
15.1
|
Letter
from KPMG LLP acknowledging awareness of the use of a report dated October
29, 2008 related to their review of interim financial
information.
|
|
|
31
|
Rule
13a-14(a)/15d-14(a) Certifications
|
|
|
31.1
|
Certification.
|
|
|
31.2
|
Certification.
|
|
|
32
|
Section
1350 Certifications
|
|
|
32.1
|
Certification.
|
|
|
32.2
|
Certification.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: October
29, 2008
|
By /s/ Rajan
Parmeswar
|
|
Rajan
Parmeswar
|
|
Vice
President, Controller and
|
|
Chief
Accounting Officer
|
INDEX
TO EXHIBITS
Exhibit
|
|
Filing
|
Number
|
Description
|
Method
|
|
|
|
12
|
Statements
re: computation of ratios
|
|
|
|
|
12.1
|
Computation
of ratio of earnings to fixed charges.
|
Electronic
|
|
|
|
15
|
Letter
re: unaudited interim financial information
|
|
|
|
|
15.1
|
Letter
from KPMG LLP acknowledging awareness of the use of a report dated October
29, 2008 related to their review of interim financial
information.
|
Electronic
|
|
|
|
31
|
Rule
13a-14(a)/15d-14(a) Certifications
|
|
|
|
|
31.1
|
Certification.
|
Electronic
|
|
|
|
31.2
|
Certification.
|
Electronic
|
|
|
|
32
|
Section
1350 Certifications
|
|
|
|
|
32.1
|
Certification.
|
Electronic
|
|
|
|
32.2
|
Certification.
|
Electronic
|
|
|
|
Page
42