form10q.htm
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 March 31, 2009
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 has submitted electronically and
posted on its corporate Web site, if any, every
|
Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter)
|
during
the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
|
|
¨
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 446.9 million shares of voting common stock with a par value of $.01 per
share outstanding at March 31, 2009.
Aetna
Inc.
Form
10-Q
For
the Quarterly Period Ended March 31, 2009
Unless
the context otherwise requires, references to the terms “we,” “our” or “us” used
throughout this Quarterly Report on Form 10-Q (except in the Report of
Independent Registered Public Accounting Firm on page 19), 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
|
20
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
32
|
Item
4.
|
Controls
and Procedures
|
32
|
|
|
|
Part
II
|
Other
Information
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
33
|
Item
1A.
|
Risk
Factors
|
33
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
33
|
Item
6.
|
Exhibits
|
34
|
|
|
|
Signatures
|
|
35
|
Index
to Exhibits
|
|
36
|
Part
I
|
Financial
Information
|
Item
1.
|
Financial
Statements
|
Consolidated
Statements of Income
(Unaudited)
|
|
For
the Three Months
|
|
|
|
Ended
March 31,
|
|
(Millions,
except per common share data)
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
Health
care premiums
|
|
$ |
6,992.2 |
|
|
$ |
6,253.5 |
|
Other
premiums
|
|
|
485.1 |
|
|
|
475.2 |
|
Fees
and other revenue *
|
|
|
893.0 |
|
|
|
825.3 |
|
Net
investment income
|
|
|
249.2 |
|
|
|
243.2 |
|
Net
realized capital losses
|
|
|
(4.8 |
) |
|
|
(58.5 |
) |
Total
revenue
|
|
|
8,614.7 |
|
|
|
7,738.7 |
|
Benefits
and expenses:
|
|
|
|
|
|
|
|
|
Health
care costs **
|
|
|
5,804.2 |
|
|
|
5,086.2 |
|
Current
and future benefits
|
|
|
503.3 |
|
|
|
508.9 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
322.5 |
|
|
|
303.8 |
|
General
and administrative expenses
|
|
|
1,229.8 |
|
|
|
1,097.1 |
|
Total
operating expenses
|
|
|
1,552.3 |
|
|
|
1,400.9 |
|
Interest
expense
|
|
|
61.5 |
|
|
|
54.4 |
|
Amortization
of other acquired intangible assets
|
|
|
24.5 |
|
|
|
27.8 |
|
Total
benefits and expenses
|
|
|
7,945.8 |
|
|
|
7,078.2 |
|
Income
before income taxes
|
|
|
668.9 |
|
|
|
660.5 |
|
Income
taxes (benefits):
|
|
|
|
|
|
|
|
|
Current
|
|
|
208.3 |
|
|
|
240.6 |
|
Deferred
|
|
|
22.8 |
|
|
|
(11.7 |
) |
Total
income taxes
|
|
|
231.1 |
|
|
|
228.9 |
|
Net
income
|
|
$ |
437.8 |
|
|
$ |
431.6 |
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.97 |
|
|
$ |
.87 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
.95 |
|
|
$ |
.85 |
|
* 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 $14.8 million and $13.6 million (net of pharmaceutical and
processing costs of $397.9 million and $378.6 million) for the three months
ended March 31, 2009 and 2008, respectively.
** Health
care costs have been reduced by insured member co-payments related to our mail
order and specialty pharmacy operations of $30.0 million and $28.1 million for
the three months ended March 31, 2009 and 2008, respectively.
Refer to
accompanying Condensed Notes to Consolidated Financial Statements
(Unaudited).
Consolidated
Balance Sheets
|
|
(Unaudited)
|
|
|
|
|
|
|
At
March 31,
|
|
|
At
December 31,
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Assets:
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,747.3 |
|
|
$ |
1,179.5 |
|
Investments
|
|
|
736.1 |
|
|
|
706.0 |
|
Premiums
receivable, net
|
|
|
816.0 |
|
|
|
616.4 |
|
Other
receivables, net
|
|
|
664.6 |
|
|
|
554.3 |
|
Accrued
investment income
|
|
|
189.6 |
|
|
|
193.6 |
|
Collateral
received under securities loan agreements
|
|
|
636.1 |
|
|
|
749.6 |
|
Income
taxes receivable
|
|
|
- |
|
|
|
164.9 |
|
Deferred
income taxes
|
|
|
297.2 |
|
|
|
301.5 |
|
Other
current assets
|
|
|
630.0 |
|
|
|
452.6 |
|
Total
current assets
|
|
|
5,716.9 |
|
|
|
4,918.4 |
|
Long-term
investments
|
|
|
15,671.7 |
|
|
|
16,163.4 |
|
Reinsurance
recoverables
|
|
|
1,001.4 |
|
|
|
1,010.3 |
|
Goodwill
|
|
|
5,085.6 |
|
|
|
5,085.6 |
|
Other
acquired intangible assets, net
|
|
|
642.9 |
|
|
|
667.4 |
|
Property
and equipment, net
|
|
|
492.6 |
|
|
|
467.5 |
|
Deferred
income taxes
|
|
|
828.4 |
|
|
|
778.7 |
|
Other
long-term assets
|
|
|
816.9 |
|
|
|
841.3 |
|
Separate
Accounts assets
|
|
|
5,722.4 |
|
|
|
5,919.9 |
|
Total
assets
|
|
$ |
35,978.8 |
|
|
$ |
35,852.5 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders' equity:
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Health
care costs payable
|
|
$ |
2,683.9 |
|
|
$ |
2,393.2 |
|
Future
policy benefits
|
|
|
743.3 |
|
|
|
759.7 |
|
Unpaid
claims
|
|
|
556.2 |
|
|
|
559.8 |
|
Unearned
premiums
|
|
|
380.9 |
|
|
|
238.6 |
|
Policyholders'
funds
|
|
|
797.1 |
|
|
|
754.4 |
|
Collateral
payable under securities loan agreements
|
|
|
636.1 |
|
|
|
749.6 |
|
Short-term
debt
|
|
|
100.0 |
|
|
|
215.7 |
|
Accrued
expenses and other current liabilities
|
|
|
1,913.4 |
|
|
|
1,883.8 |
|
Total
current liabilities
|
|
|
7,810.9 |
|
|
|
7,554.8 |
|
Future
policy benefits
|
|
|
6,705.3 |
|
|
|
6,765.4 |
|
Unpaid
claims
|
|
|
1,295.3 |
|
|
|
1,271.2 |
|
Policyholders'
funds
|
|
|
1,096.6 |
|
|
|
1,171.7 |
|
Long-term
debt
|
|
|
3,638.6 |
|
|
|
3,638.3 |
|
Other
long-term liabilities
|
|
|
1,345.8 |
|
|
|
1,344.8 |
|
Separate
Accounts liabilities
|
|
|
5,722.4 |
|
|
|
5,919.9 |
|
Total
liabilities
|
|
|
27,614.9 |
|
|
|
27,666.1 |
|
Commitments
and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock ($.01 par value; 2.7 billion shares authorized; 446.9 million and
456.3 million
|
|
|
|
|
|
|
|
|
shares
issued and outstanding in 2009 and 2008, respectively) and additional
paid-in capital
|
|
|
396.0 |
|
|
|
351.2 |
|
Retained
earnings
|
|
|
9,877.4 |
|
|
|
9,716.5 |
|
Accumulated
other comprehensive loss
|
|
|
(1,909.5 |
) |
|
|
(1,881.3 |
) |
Total
shareholders' equity
|
|
|
8,363.9 |
|
|
|
8,186.4 |
|
Total
liabilities and shareholders' equity
|
|
$ |
35,978.8 |
|
|
$ |
35,852.5 |
|
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
|
|
|
|
|
|
Comprehensive
|
|
(Millions)
|
|
Outstanding
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
|
|
Income
|
|
Three
Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
|
456.3 |
|
|
$ |
351.2 |
|
|
$ |
9,716.5 |
|
|
$ |
(1,881.3 |
) |
|
$ |
8,186.4 |
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
437.8 |
|
|
|
- |
|
|
|
437.8 |
|
|
$ |
437.8 |
|
Other
comprehensive loss (Note 6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(65.3 |
) |
|
|
(65.3 |
) |
|
|
|
|
Net
foreign currency losses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1.5 |
) |
|
|
(1.5 |
) |
|
|
|
|
Net
derivative gains
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.9 |
|
|
|
3.9 |
|
|
|
|
|
Pension
and OPEB plans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
34.7 |
|
|
|
34.7 |
|
|
|
|
|
Other
comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(28.2 |
) |
|
|
(28.2 |
) |
|
|
(28.2 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
409.6 |
|
Common
shares issued for benefit plans,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
tax benefits
|
|
|
1.0 |
|
|
|
44.9 |
|
|
|
- |
|
|
|
- |
|
|
|
44.9 |
|
|
|
|
|
Repurchases
of common shares
|
|
|
(10.4 |
) |
|
|
(.1 |
) |
|
|
(276.9 |
) |
|
|
- |
|
|
|
(277.0 |
) |
|
|
|
|
Balance
at March 31, 2009
|
|
|
446.9 |
|
|
$ |
396.0 |
|
|
$ |
9,877.4 |
|
|
$ |
(1,909.5 |
) |
|
$ |
8,363.9 |
|
|
|
|
|
Three
Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
|
496.3 |
|
|
$ |
188.8 |
|
|
$ |
10,138.0 |
|
|
$ |
(288.4 |
) |
|
$ |
10,038.4 |
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
431.6 |
|
|
|
- |
|
|
|
431.6 |
|
|
$ |
431.6 |
|
Other
comprehensive loss (Note 6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(49.5 |
) |
|
|
(49.5 |
) |
|
|
|
|
Net
foreign currency gains
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
.5 |
|
|
|
.5 |
|
|
|
|
|
Net
derivative losses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(.9 |
) |
|
|
(.9 |
) |
|
|
|
|
Pension
and OPEB plans
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
.5 |
|
|
|
.5 |
|
|
|
|
|
Other
comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(49.4 |
) |
|
|
(49.4 |
) |
|
|
(49.4 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
382.2 |
|
Common
shares issued for benefit plans,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
tax benefits
|
|
|
1.3 |
|
|
|
60.9 |
|
|
|
- |
|
|
|
- |
|
|
|
60.9 |
|
|
|
|
|
Repurchases
of common shares
|
|
|
(12.8 |
) |
|
|
(.1 |
) |
|
|
(599.9 |
) |
|
|
- |
|
|
|
(600.0 |
) |
|
|
|
|
Balance
at March 31, 2008
|
|
|
484.8 |
|
|
$ |
249.6 |
|
|
$ |
9,969.7 |
|
|
$ |
(337.8 |
) |
|
$ |
9,881.5 |
|
|
|
|
|
Refer to
accompanying Condensed Notes to Consolidated Financial Statements
(Unaudited).
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
437.8 |
|
|
$ |
431.6 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
97.0 |
|
|
|
88.2 |
|
Equity
in earnings of affiliates, net
|
|
|
10.2 |
|
|
|
29.8 |
|
Stock-based
compensation expense
|
|
|
37.2 |
|
|
|
31.7 |
|
Net
realized capital losses
|
|
|
4.8 |
|
|
|
58.5 |
|
(Accretion)
amortization of net investment (discount) premium
|
|
|
(16.5 |
) |
|
|
4.9 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accrued
investment income
|
|
|
4.0 |
|
|
|
(5.3 |
) |
Premiums
due and other receivables
|
|
|
(256.9 |
) |
|
|
(264.2 |
) |
Income
taxes
|
|
|
216.7 |
|
|
|
187.1 |
|
Other
assets and other liabilities
|
|
|
(68.7 |
) |
|
|
(46.5 |
) |
Health
care and insurance liabilities
|
|
|
361.7 |
|
|
|
381.4 |
|
Other,
net
|
|
|
(1.0 |
) |
|
|
.4 |
|
Net
cash provided by operating activities
|
|
|
826.3 |
|
|
|
897.6 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sales and maturities of investments
|
|
|
2,490.7 |
|
|
|
2,803.8 |
|
Cost
of investments
|
|
|
(2,287.3 |
) |
|
|
(3,239.1 |
) |
Increase
in property, equipment and software
|
|
|
(88.6 |
) |
|
|
(82.7 |
) |
Net
cash provided by (used for) investing activities
|
|
|
114.8 |
|
|
|
(518.0 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
(repayment) issuance of short-term debt
|
|
|
(114.8 |
) |
|
|
248.7 |
|
Deposits
and interest credited for investment contracts
|
|
|
1.9 |
|
|
|
2.0 |
|
Withdrawals
of investment contracts
|
|
|
(3.9 |
) |
|
|
(1.1 |
) |
Common
shares issued under benefit plans
|
|
|
3.7 |
|
|
|
13.0 |
|
Stock-based
compensation tax benefits
|
|
|
3.6 |
|
|
|
17.0 |
|
Common
shares repurchased
|
|
|
(263.8 |
) |
|
|
(552.6 |
) |
Other,
net
|
|
|
- |
|
|
|
10.1 |
|
Net
cash used for financing activities
|
|
|
(373.3 |
) |
|
|
(262.9 |
) |
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
567.8 |
|
|
|
116.7 |
|
Cash
and cash equivalents, beginning of period
|
|
|
1,179.5 |
|
|
|
1,254.0 |
|
Cash
and cash equivalents, end of period
|
|
$ |
1,747.3 |
|
|
$ |
1,370.7 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$ |
10.9 |
|
|
$ |
24.7 |
|
Interest
paid
|
|
|
36.8 |
|
|
|
20.4 |
|
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 and supplemental group term life insurance, 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, (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 period 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 2008 Annual Report on Form 10-K
(our “2008 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 2008 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
Noncontrolling
Interests
In
December 2007, the Financial Accounting Standards Board (“FASB”) released
Financial Accounting Standards (“FAS”) No. 160, “Noncontrolling Interests in
Consolidated Financial Statements.” FAS 160 amends previous
guidance and establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary (often otherwise referred to as minority
interests) and for deconsolidation of the subsidiary. FAS 160 was
effective on January 1, 2009. We do not have material noncontrolling
interests, and therefore, the adoption of FAS 160 did not impact our financial
position or results of operations. Refer to Note 5 beginning on page
7 for additional information.
Future
Application of Accounting Standards
Fair
Value Measurements - Assessing Fair Value in Market Conditions That are Not
Orderly
In April
2009, the FASB released FASB Staff Position (“FSP”) No. FAS 157-4 “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not
Orderly.” This FSP provides guidance as to how to determine
the fair value of assets and liabilities in distressed economic
conditions. It also amends the disclosure requirements of FAS 157
“Fair Value
Measurements” to require greater disaggregation of debt and equity
securities. FSP FAS 157-4 will be effective for us on June 30,
2009. We are currently assessing the impact of this FSP to our
financial position and results of operations.
Recognition
and Presentation of Other-Than-Temporary Impairments
Also in
April 2009, the FASB released FSP No. FAS 115-2 and FAS 124-2 “Recognition and Presentation of
Other-Than-Temporary Impairments.” This FSP amends the
accounting for other-than-temporary impairments (“OTTI”) by establishing new
criteria for the recognition of OTTI on debt securities and also requiring
additional financial statement disclosure. This FSP will be effective
for us on June 30, 2009. We are currently assessing the impact of
this FSP to our financial position and results of operations.
3.
|
Earnings
Per Common Share
|
Basic
earnings per share (“EPS”) is computed by dividing income available to
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 we
adjust the weighted average number of common shares outstanding 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 months ended March 31, 2009
and 2008 are as follows:
(Millions,
except per common share data)
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
437.8 |
|
|
$ |
431.6 |
|
Weighted
average shares used to compute basic EPS
|
|
|
452.7 |
|
|
|
494.2 |
|
Dilutive
effect of outstanding stock-based compensation awards (1)
|
|
|
8.9 |
|
|
|
14.9 |
|
Weighted
average shares used to compute diluted EPS
|
|
|
461.6 |
|
|
|
509.1 |
|
Basic
EPS
|
|
$ |
.97 |
|
|
$ |
.87 |
|
Diluted
EPS
|
|
$ |
.95 |
|
|
$ |
.85 |
|
(1)
|
Approximately
6.2 million stock options (with exercise prices ranging from $35.34 to
$42.35) and 19.5 million stock appreciation rights (with exercise prices
ranging from $32.11 to $59.76) were not included in the calculation of
diluted EPS for the three months ended March 31, 2009 because their
exercise prices were greater than the average market price of our common
shares during such period.
|
For the
three months ended March 31, 2009 and 2008, 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:
(Millions)
|
|
2009
|
|
|
2008
|
|
Selling
expenses
|
|
$ |
322.5 |
|
|
$ |
303.8 |
|
General
and administrative expenses:
|
|
|
|
|
|
|
|
|
Salaries
and related benefits
|
|
|
750.2 |
|
|
|
642.9 |
|
Other
general and administrative expenses
|
|
|
479.6 |
|
|
|
454.2 |
|
Total
general and administrative expenses
|
|
|
1,229.8 |
|
|
|
1,097.1 |
|
Total
operating expenses
|
|
$ |
1,552.3 |
|
|
$ |
1,400.9 |
|
Total
investments at March 31, 2009 and December 31, 2008 were as
follows:
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
(Millions)
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
|
Current
|
|
|
Long-term
|
|
|
Total
|
|
Debt
and equity securities available for sale
|
|
$ |
691.9 |
|
|
$ |
12,906.0 |
|
|
$ |
13,597.9 |
|
|
$ |
633.8 |
|
|
$ |
13,359.5 |
|
|
$ |
13,993.3 |
|
Mortgage
loans
|
|
|
43.9 |
|
|
|
1,610.0 |
|
|
|
1,653.9 |
|
|
|
70.4 |
|
|
|
1,609.5 |
|
|
|
1,679.9 |
|
Other
investments
|
|
|
.3 |
|
|
|
1,155.7 |
|
|
|
1,156.0 |
|
|
|
1.8 |
|
|
|
1,194.4 |
|
|
|
1,196.2 |
|
Total
investments
|
|
$ |
736.1 |
|
|
$ |
15,671.7 |
|
|
$ |
16,407.8 |
|
|
$ |
706.0 |
|
|
$ |
16,163.4 |
|
|
$ |
16,869.4 |
|
Net
Investment Income
Sources
of net investment income for the three months ended March 31, 2009 and 2008 were
as follows:
(Millions)
|
|
2009
|
|
|
2008
|
|
Debt
securities
|
|
$ |
223.6 |
|
|
$ |
209.5 |
|
Mortgage
loans
|
|
|
29.2 |
|
|
|
27.7 |
|
Other
|
|
|
3.5 |
|
|
|
14.5 |
|
Gross
investment income
|
|
|
256.3 |
|
|
|
251.7 |
|
Less:
investment expenses
|
|
|
(7.1 |
) |
|
|
(8.5 |
) |
Net
investment income (1)
|
|
$ |
249.2 |
|
|
$ |
243.2 |
|
(1)
|
Investment
risks associated with our experience-rated and discontinued products
generally do not impact our results of operations (refer to Note 14
beginning on page 17 for additional information on our accounting for
discontinued products). Net investment income includes $80.5 million and
$86.4 million in 2009 and 2008, respectively, related to investments
supporting our experience-rated and discontinued
products.
|
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
March 31, 2009 and December 31, 2008, 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
|
|
March
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities
|
$ |
1.5 |
|
|
$ |
- |
|
|
$ |
23.9 |
|
|
$ |
.4 |
|
|
$ |
25.4 |
|
|
$ |
.4 |
|
States,
municipalities and political subdivisions
|
|
526.3 |
|
|
|
19.9 |
|
|
|
300.6 |
|
|
|
28.0 |
|
|
|
826.9 |
|
|
|
47.9 |
|
U.S.
corporate securities
|
|
1,742.2 |
|
|
|
160.7 |
|
|
|
1,587.8 |
|
|
|
364.4 |
|
|
|
3,330.0 |
|
|
|
525.1 |
|
Foreign
securities
|
|
651.1 |
|
|
|
54.4 |
|
|
|
282.1 |
|
|
|
69.4 |
|
|
|
933.2 |
|
|
|
123.8 |
|
Mortgage-backed
and other asset-backed securities
|
|
444.7 |
|
|
|
76.8 |
|
|
|
504.4 |
|
|
|
198.8 |
|
|
|
949.1 |
|
|
|
275.6 |
|
Redeemable
preferred securities
|
|
77.8 |
|
|
|
27.7 |
|
|
|
123.7 |
|
|
|
130.6 |
|
|
|
201.5 |
|
|
|
158.3 |
|
Total
debt securities
|
|
3,443.6 |
|
|
|
339.5 |
|
|
|
2,822.5 |
|
|
|
791.6 |
|
|
|
6,266.1 |
|
|
|
1,131.1 |
|
Equity
securities
|
|
14.6 |
|
|
|
5.5 |
|
|
|
9.7 |
|
|
|
8.8 |
|
|
|
24.3 |
|
|
|
14.3 |
|
Total
debt and equity securities
|
$ |
3,458.2 |
|
|
$ |
345.0 |
|
|
$ |
2,832.2 |
|
|
$ |
800.4 |
|
|
$ |
6,290.4 |
|
|
$ |
1,145.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government securities
|
$ |
4.0 |
|
|
$ |
- |
|
|
$ |
24.4 |
|
|
$ |
.4 |
|
|
$ |
28.4 |
|
|
$ |
.4 |
|
States,
municipalities and political subdivisions
|
|
786.9 |
|
|
|
42.8 |
|
|
|
175.6 |
|
|
|
29.6 |
|
|
|
962.5 |
|
|
|
72.4 |
|
U.S.
corporate securities
|
|
2,010.4 |
|
|
|
167.9 |
|
|
|
1,238.6 |
|
|
|
248.6 |
|
|
|
3,249.0 |
|
|
|
416.5 |
|
Foreign
securities
|
|
777.7 |
|
|
|
73.6 |
|
|
|
178.6 |
|
|
|
51.4 |
|
|
|
956.3 |
|
|
|
125.0 |
|
Mortgage-backed
and other asset-backed securities
|
|
616.6 |
|
|
|
94.7 |
|
|
|
504.1 |
|
|
|
204.3 |
|
|
|
1,120.7 |
|
|
|
299.0 |
|
Redeemable
preferred securities
|
|
125.3 |
|
|
|
32.5 |
|
|
|
139.7 |
|
|
|
74.5 |
|
|
|
265.0 |
|
|
|
107.0 |
|
Total
debt securities
|
|
4,320.9 |
|
|
|
411.5 |
|
|
|
2,261.0 |
|
|
|
608.8 |
|
|
|
6,581.9 |
|
|
|
1,020.3 |
|
Equity
securities
|
|
24.5 |
|
|
|
9.5 |
|
|
|
.8 |
|
|
|
2.6 |
|
|
|
25.3 |
|
|
|
12.1 |
|
Total
debt and equity securities
|
$ |
4,345.4 |
|
|
$ |
421.0 |
|
|
$ |
2,261.8 |
|
|
$ |
611.4 |
|
|
$ |
6,607.2 |
|
|
$ |
1,032.4 |
|
(1)
|
Investment
risks associated with our experience-rated and discontinued products
generally do not impact our results of operations (refer to Note 14
beginning on page 17 for additional information on our accounting for
discontinued products). At March 31, 2009 and December 31,
2008, debt and equity securities in an unrealized loss position of $403.0 million
and $334.7
million, respectively, and related fair value of $1.8 billion
at both dates related to discontinued and experience-rated
products.
|
We have
reviewed the securities in the table above and have concluded that these are
performing assets generating investment income to support the needs of our
business. In performing this review, we considered factors such as
the quality of the investment security based on research performed by external
rating agencies and our internal credit analysts and the prospects of realizing
the carrying value of the security based on the investment’s current prospects
for recovery. On the basis of these factors, we have the ability and
intent to hold these securities until their cost can be
recovered. Therefore we did not take an OTTI loss on these
investments. Unrealized losses at March 31, 2009 and December 31,
2008 were generally caused by the widening of credit spreads relative to the
interest rates on U.S. Treasury securities.
Net
realized capital losses for the three months ended March 31, 2009 and 2008,
excluding amounts related to experience-rated contract holders and discontinued
products, were as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Other-than-temporary
impairments-yield related
|
|
$ |
(38.3 |
) |
|
$ |
(80.1 |
) |
Other-than-temporary
impairments-credit related
|
|
|
(9.5 |
) |
|
|
(1.9 |
) |
Sales
of debt securities
|
|
|
35.7 |
|
|
|
19.7 |
|
Other
|
|
|
7.3 |
|
|
|
3.8 |
|
Pretax
net realized capital losses
|
|
$ |
(4.8 |
) |
|
$ |
(58.5 |
) |
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.
Variable
Interest Entities (“VIEs”)
We do not
have any material relationships with VIEs which require
consolidation. We have relationships with certain real estate and
hedge fund partnerships that are considered VIEs. When determining
that these relationships were VIEs, we considered if we should consolidate the
entity by determining if we would receive the majority of the expected losses
and the expected residual returns. Based on this analysis, we would
not be considered the primary beneficiary of these investments. We
record the amount of our investment in these partnerships as long-term
investments on our balance sheets and recognize our share of partnership income
or losses in earnings. Our maximum exposure to loss as a result of
our investment in these partnerships is our investment balance at March 31, 2009
and December 31, 2008 of approximately $122 million and $103 million,
respectively, and the risk of recapture of tax credits related to the real
estate partnerships previously recognized, which we do not believe is
significant. We do not have a future obligation to fund losses or to
fund debt on behalf of these investments, however, we may voluntarily contribute
funds. The real estate partnerships construct, own and manage
low-income housing developments and had total assets of approximately $4.7
billion and $4.4 billion at March 31, 2009 and December 31, 2008,
respectively. The hedge fund partnerships had total assets of
approximately $5.8 billion and $7.2 billion at March 31, 2009 and December 31,
2008, respectively.
Noncontrolling
Interests
Certain
of our investment holdings are partially-owned by third parties. At
March 31, 2009 and December 31, 2008, $85.9 million and $86.3 million,
respectively, of our investments were owned by third parties. The
noncontrolling entities’ share of these investments were included in accrued
expenses and other current liabilities. Net investment loss related
to these interests was $.3 million and $1.3 million for the three months ended
March 31, 2009 and 2008, respectively. These noncontrolling interests
did not have a material impact on our financial position or results of
operations.
6.
|
Other
Comprehensive (Loss) Income
|
Shareholders’
equity included the following activity in accumulated other comprehensive (loss)
income (excluding amounts related to experience-rated contract holders and
discontinued products) for the three months ended March 31, 2009 and
2008.
|
|
Net
Unrealized Gains (Losses)
|
|
|
Pension
and OPEB Plans
|
|
|
|
|
(Millions)
|
|
Securities
|
|
|
Foreign
Currency
|
|
|
Derivatives
|
|
|
Unrecognized
Net
Actuarial
Losses
|
|
|
Unrecognized
Prior Service Cost |
|
|
Total
Other Comprehensive (Loss) Income
|
|
Three
Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
$ |
(229.3 |
) |
|
$ |
7.9 |
|
|
$ |
(16.6 |
) |
|
$ |
(1,686.6 |
) |
|
$ |
43.3 |
|
|
$ |
(1,881.3 |
) |
Unrealized
net (losses) gains arising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
the period ($(79.1) pretax)
|
|
|
(60.9 |
) |
|
|
(1.5 |
) |
|
|
11.0 |
|
|
|
- |
|
|
|
- |
|
|
|
(51.4 |
) |
Reclassification
to earnings ($41.9 pretax)
|
|
|
(4.4 |
) |
|
|
- |
|
|
|
(7.1 |
) |
|
|
35.7 |
|
|
|
(1.0 |
) |
|
|
23.2 |
|
Other
comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
the period
|
|
|
(65.3 |
) |
|
|
(1.5 |
) |
|
|
3.9 |
|
|
|
35.7 |
|
|
|
(1.0 |
) |
|
|
(28.2 |
) |
Balance
at March 31, 2009
|
|
$ |
(294.6 |
) |
|
$ |
6.4 |
|
|
$ |
(12.7 |
) |
|
$ |
(1,650.9 |
) |
|
$ |
42.3 |
|
|
$ |
(1,909.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
$ |
53.3 |
|
|
$ |
15.2 |
|
|
$ |
(8.2 |
) |
|
$ |
(395.8 |
) |
|
$ |
47.1 |
|
|
$ |
(288.4 |
) |
Unrealized
net (losses) gains arising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
the period ($(144.9) pretax)
|
|
|
(93.2 |
) |
|
|
.5 |
|
|
|
(1.5 |
) |
|
|
- |
|
|
|
- |
|
|
|
(94.2 |
) |
Reclassification
to earnings ($68.9 pretax)
|
|
|
43.7 |
|
|
|
- |
|
|
|
.6 |
|
|
|
1.4 |
|
|
|
(.9 |
) |
|
|
44.8 |
|
Other
comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
the period
|
|
|
(49.5 |
) |
|
|
.5 |
|
|
|
(.9 |
) |
|
|
1.4 |
|
|
|
(.9 |
) |
|
|
(49.4 |
) |
Balance
at March 31, 2008
|
|
$ |
3.8 |
|
|
$ |
15.7 |
|
|
$ |
(9.1 |
) |
|
$ |
(394.4 |
) |
|
$ |
46.2 |
|
|
$ |
(337.8 |
) |
7.
|
Employee
Benefit Plans
|
Defined
Benefit Retirement Plans
Components
of the net periodic benefit cost (income) of our noncontributory defined benefit
pension plans and other postretirement benefit (“OPEB”) plans for the three
months ended March 31, 2009 and 2008 were as follows:
|
|
Pension
Plans
|
|
|
OPEB
Plans
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
12.0 |
|
|
$ |
10.8 |
|
|
$ |
.1 |
|
|
$ |
.1 |
|
Interest
cost
|
|
|
79.1 |
|
|
|
78.0 |
|
|
|
5.4 |
|
|
|
5.0 |
|
Expected
return on plan assets
|
|
|
(79.7 |
) |
|
|
(121.1 |
) |
|
|
(1.0 |
) |
|
|
(1.0 |
) |
Recognized
net actuarial loss
|
|
|
54.1 |
|
|
|
1.6 |
|
|
|
.8 |
|
|
|
.6 |
|
Amortization
of prior service costs
|
|
|
(.5 |
) |
|
|
(.5 |
) |
|
|
(.9 |
) |
|
|
(.9 |
) |
Net
periodic benefit cost (income)
|
|
$ |
65.0 |
|
|
$ |
(31.2 |
) |
|
$ |
4.4 |
|
|
$ |
3.8 |
|
The
increase in pension benefit cost is primarily attributable to the decline in the
plan assets’ fair value of approximately $1.9 billion during
2008. This decline was due to the deteriorating economic conditions
experienced during the past year.
The
carrying value of our long-term debt at March 31, 2009 and December 31, 2008 was
as follows:
|
|
March
31,
|
|
|
December
31,
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Senior
notes, 5.75%, due 2011
|
|
$ |
449.8 |
|
|
$ |
449.8 |
|
Senior
notes, 7.875%, due 2011
|
|
|
449.3 |
|
|
|
449.2 |
|
Senior
notes, 6.0%, due 2016
|
|
|
746.8 |
|
|
|
746.7 |
|
Senior
notes, 6.5%, due 2018
|
|
|
498.7 |
|
|
|
498.6 |
|
Senior
notes, 6.625%, due 2036
|
|
|
798.6 |
|
|
|
798.6 |
|
Senior
notes, 6.75%, due 2037
|
|
|
695.4 |
|
|
|
695.4 |
|
Total
long-term debt
|
|
$ |
3,638.6 |
|
|
$ |
3,638.3 |
|
At March
31, 2009 and December 31, 2008, we had approximately $100 million and $216
million, respectively, of commercial paper outstanding with a weighted average
interest rate of 1.13% and 5.36%, respectively.
At March
31, 2009, we had an unsecured $1.5 billion revolving credit agreement (the
“Facility”) with several financial institutions which terminates in March
2013. The Facility 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. Upon our agreement with one or more
financial institutions, we may expand the aggregate commitments under the
Facility to a maximum of $2.0 billion. Various interest rate
options are available under the Facility. Any revolving borrowings
mature on the termination date of the Facility. We pay facility fees
on the Facility ranging from .045% to .175% per annum, depending upon our
long-term senior unsecured debt rating. The facility fee was .06% at
March 31, 2009. 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 March 31, 2009. There were no
amounts outstanding under the Facility at March 31, 2009.
During
the three months ended March 31, 2009, we entered into four interest rate swaps
with a notional value of $100 million each. We entered into these
swaps to hedge interest rate exposure in anticipation of future issuance of
long-term debt. At March 31, 2009, the interest rate swaps had an
aggregate fair value of $3.5 million and we recorded a $3.5 million gain in
other comprehensive income for the three months ended March 31,
2009.
On June
27, 2008 and February 27, 2009, our Board of Directors (the “Board”) authorized
two share repurchase programs each for the repurchase of up to $750 million of
our common stock. During the first quarter of 2009, we repurchased
approximately 10 million shares of common stock at a cost of approximately $277
million (approximately $13 million of these repurchases were settled in early
April). At March 31, 2009, we had remaining authorization to
repurchase an aggregate of up to approximately $1.1 billion of common stock
under the Board authorizations.
On
February 13,
2009, approximately 5.2 million stock
appreciation rights (“SARs”), .5 million
restricted stock units (“RSUs”) and .7 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 $32.11 per
share. The number of vested PSUs (which could range from zero to 200%
of the original number of units granted) is dependent upon the degree to which
we achieve performance goals during the performance period as determined by the
Board’s Committee on Compensation and Organization. For each vested
RSU and PSU, 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 performance period for the PSUs ends on December 31,
2010.
10.
|
Dividend
Restrictions and Statutory Surplus
|
Under
regulatory requirements at March 31, 2009, the amount of dividends that may be
paid to Aetna through the end of 2009 by our insurance and HMO subsidiaries
without prior approval by regulatory authorities is approximately $1.4 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
$5.9 billion and $5.7 billion at March 31, 2009 and December 31, 2008,
respectively.
11.
|
Fair
Value Measurements
|
Financial
Instruments Measured at Fair Value in our Balance Sheets
Certain
of our financial instruments held are measured at fair value in our balance
sheets. The fair value of these instruments are based on valuations
that include inputs that can be classified within one of three levels of a
hierarchy established by FAS 157. The following are the levels of the
hierarchy and a brief description of the type of valuation information that
qualifies a financial asset or liability 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 and liabilities are
available, we use these quoted market prices to determine the fair value of
financial assets and liabilities and classify these assets and liabilities as
Level 1. In other cases where a quoted market price for identical
assets and liabilities 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 and liabilities 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 and liabilities will be classified based upon
the lowest level of input that is significant to the valuation. Thus,
financial assets and liabilities 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 our financial
assets and liabilities measured at fair value, including the general
classification of such assets and liabilities 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 and did not adjust
any of these prices at March 31, 2009 and December 31, 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 of these quotes at March
31, 2009 and December 31, 2008. The total fair value of our broker
quoted securities was approximately $331 million at March 31, 2009 and $353
million at December 31, 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 and liabilities with changes in fair value that are measured on
a recurring basis on our balance sheets at March 31, 2009 and December 31, 2008
were as follows:
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Securities
|
|
$ |
654.6 |
|
|
$ |
12,491.0 |
|
|
$ |
422.6 |
|
|
$ |
13,568.2 |
|
|
$ |
669.9 |
|
|
$ |
12,836.2 |
|
|
$ |
455.7 |
|
|
$ |
13,961.8 |
|
Equity
Securities
|
|
|
1.5 |
|
|
|
- |
|
|
|
28.2 |
|
|
|
29.7 |
|
|
|
2.2 |
|
|
|
- |
|
|
|
29.3 |
|
|
|
31.5 |
|
Derivatives
|
|
|
- |
|
|
|
3.8 |
|
|
|
- |
|
|
|
3.8 |
|
|
|
- |
|
|
|
1.8 |
|
|
|
- |
|
|
|
1.8 |
|
Total
investments
|
|
$ |
656.1 |
|
|
$ |
12,494.8 |
|
|
$ |
450.8 |
|
|
$ |
13,601.7 |
|
|
$ |
672.1 |
|
|
$ |
12,838.0 |
|
|
$ |
485.0 |
|
|
$ |
13,995.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$ |
- |
|
|
$ |
.2 |
|
|
$ |
- |
|
|
$ |
.2 |
|
|
$ |
- |
|
|
$ |
4.0 |
|
|
$ |
- |
|
|
$ |
4.0 |
|
The
changes in the balances of Level 3 financial assets for the three months ended
March 31, 2009 and 2008 were as follows:
|
|
Three
Months Ended
March
31, 2009
|
|
|
Three
Months Ended
March
31, 2008
|
|
(Millions)
|
|
Debt
Securities
|
|
|
Equity
Securities
|
|
|
Total
|
|
|
Debt
Securities
|
|
|
Equity
Securities
|
|
|
Total
|
|
Beginning
balance
|
|
$ |
455.7 |
|
|
$ |
29.3 |
|
|
$ |
485.0 |
|
|
$ |
642.5 |
|
|
$ |
38.9 |
|
|
$ |
681.4 |
|
Net
realized and unrealized capital (losses) gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in earnings
|
|
|
1.0 |
|
|
|
- |
|
|
|
1.0 |
|
|
|
(9.1 |
) |
|
|
- |
|
|
|
(9.1 |
) |
Included
in other comprehensive income
|
|
|
1.2 |
|
|
|
1.3 |
|
|
|
2.5 |
|
|
|
(2.6 |
) |
|
|
- |
|
|
|
(2.6 |
) |
Other
(1)
|
|
|
(1.0 |
) |
|
|
(2.4 |
) |
|
|
(3.4 |
) |
|
|
(10.5 |
) |
|
|
10.4 |
|
|
|
(.1 |
) |
Purchases,
sales and maturities
|
|
|
(17.1 |
) |
|
|
- |
|
|
|
(17.1 |
) |
|
|
.7 |
|
|
|
(22.4 |
) |
|
|
(21.7 |
) |
Transfers
into (out of) Level 3
(2)
|
|
|
(17.2 |
) |
|
|
- |
|
|
|
(17.2 |
) |
|
|
26.9 |
|
|
|
6.2 |
|
|
|
33.1 |
|
Ending
Balance
|
|
$ |
422.6 |
|
|
$ |
28.2 |
|
|
$ |
450.8 |
|
|
$ |
647.9 |
|
|
$ |
33.1 |
|
|
$ |
681.0 |
|
Amount
of Level 3 net unrealized capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses
included in net income
|
|
$ |
(2.4 |
) |
|
$ |
- |
|
|
$ |
(2.4 |
) |
|
$ |
(9.5 |
) |
|
$ |
- |
|
|
$ |
(9.5 |
) |
(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 Measured at Fair Value in our Balance Sheets
Separate
Account assets in our Large Case Pensions business 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 14. 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 March 31, 2009 and December 31, 2008 were as follows:
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
(Millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Securities
|
|
$ |
695.8 |
|
|
$ |
2,322.0 |
|
|
$ |
325.4 |
|
|
$ |
3,343.2 |
|
|
$ |
631.5 |
|
|
$ |
2,412.1 |
|
|
$ |
365.1 |
|
|
$ |
3,408.7 |
|
Equity
Securities
|
|
|
1,558.2 |
|
|
|
1.0 |
|
|
|
- |
|
|
|
1,559.2 |
|
|
|
1,629.2 |
|
|
|
2.1 |
|
|
|
- |
|
|
|
1,631.3 |
|
Derivatives
|
|
|
- |
|
|
|
(1.0 |
) |
|
|
- |
|
|
|
(1.0 |
) |
|
|
- |
|
|
|
(.1 |
) |
|
|
- |
|
|
|
(.1 |
) |
Real
Estate
|
|
|
- |
|
|
|
- |
|
|
|
79.8 |
|
|
|
79.8 |
|
|
|
- |
|
|
|
- |
|
|
|
86.7 |
|
|
|
86.7 |
|
Total
(1)
|
|
$ |
2,254.0 |
|
|
$ |
2,322.0 |
|
|
$ |
405.2 |
|
|
$ |
4,981.2 |
|
|
$ |
2,260.7 |
|
|
$ |
2,414.1 |
|
|
$ |
451.8 |
|
|
$ |
5,126.6 |
|
(1)
|
Excludes
$741.2 million and $793.3 million of cash and cash equivalents and other
receivables at March 31, 2009 and December 31, 2008,
respectively.
|
The
changes in the balances of Level 3 Separate Account financial assets for the
three months ended March 31, 2009 and 2008 were as follows:
|
|
Three
Months Ended
March
31, 2009
|
|
|
Three
Months Ended
March
31, 2008
|
|
(Millions)
|
|
Debt
Securities
|
|
|
Real
Estate
|
|
|
Total
|
|
|
Debt
Securities
|
|
|
Real
Estate
|
|
|
Total
|
|
Beginning
balance
|
|
$ |
365.1 |
|
|
$ |
86.7 |
|
|
$ |
451.8 |
|
|
$ |
291.5 |
|
|
$ |
12,541.8 |
|
|
$ |
12,833.3 |
|
Total
(losses) gains accrued to contract holders
|
|
|
(77.0 |
) |
|
|
(6.9 |
) |
|
|
(83.9 |
) |
|
|
(1.0 |
) |
|
|
37.9 |
|
|
|
36.9 |
|
Purchases,
sales and maturities
|
|
|
32.3 |
|
|
|
- |
|
|
|
32.3 |
|
|
|
(14.0 |
) |
|
|
(11.3 |
) |
|
|
(25.3 |
) |
Net
transfers into Level 3
(1)
|
|
|
5.0 |
|
|
|
- |
|
|
|
5.0 |
|
|
|
1.2 |
|
|
|
- |
|
|
|
1.2 |
|
Transfers
of Separate Account assets (2)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(11,654.3 |
) |
|
|
(11,654.3 |
) |
Ending
Balance
|
|
$ |
325.4 |
|
|
$ |
79.8 |
|
|
$ |
405.2 |
|
|
$ |
277.7 |
|
|
$ |
914.1 |
|
|
$ |
1,191.8 |
|
(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)
|
During
February 2008, approximately $11.7 billion of our Separate Account assets
were transitioned out of our
business.
|
12.
|
Commitments
and Contingencies
|
Litigation
and Regulatory Proceedings
Out-of-Network
Benefit Proceedings
We are
named as a defendant in several purported class actions arising out of our
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”).
Other major health insurers are also the subject of similar
litigation. Among other things, these lawsuits charge that we paid
too little to members and/or providers for these services, among other reasons
because of our use of data provided by Ingenix, Inc., a subsidiary of one of our
competitors.
The
American Medical Association (the “AMA”), Kathy Tisko and Abraham I. Kosma
together seek to represent nationwide classes of out-of-network providers who
provided services to our members during the period from 2001 to the
present. Michele Cooper, Jeffrey M. Weintraub and John Seney together seek
to represent nationwide classes of our members who received services from
out-of-network providers during the period from 2001 to the present. Taken
together, these lawsuits allege that we violated state law, the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”), the Racketeer
Influenced and Corrupt Organizations Act and federal antitrust laws, either
acting alone or in concert with our competitors. The purported
classes 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.
The
Cooper, Weintraub, Seney, AMA and Tisko cases were commenced on July 30, 2007,
April 29, 2008, January 28, 2009, February 9, 2009 and April 3, 2009,
respectively. These cases are pending in federal district courts in
New Jersey and Connecticut. On April 8, 2009, the federal Judicial
Panel on Multi-District Litigation ordered consolidation of these cases for
pre-trial proceedings in federal district court in New Jersey. The Kosma case was commenced in
federal district court in New Jersey on April 21,
2009.
We intend
to vigorously defend ourselves against the claims brought in these cases, which
are in their preliminary stages.
On
January 15, 2009, Aetna and the New York Attorney General announced an agreement
relating to an industry-wide investigation into certain payment practices with
respect to out-of-network providers. The agreement provides that Aetna will
contribute $20 million towards the establishment of an independent database
system to provide fee information regarding out-of-network reimbursement rates.
When the new database is ready, Aetna will cease using databases owned by
Ingenix and will use the new database for a period of at least five years in
connection with out-of-network reimbursements in those benefit plans that employ
a reasonable and customary standard for out-of-network reimbursements. In
February 2009, Aetna agreed with the New York Attorney General and the Texas
Attorney General to reimburse college student members for approximately $5
million of claims relating to care rendered by out-of-network providers. In
March 2009, Aetna paid an administrative penalty of $2.5 million to the New
Jersey Department of Banking and Insurance in connection with our out-of-network
benefit payment practices.
We also
have received subpoenas and/or requests for documents and other information from
attorneys general and other state and/or federal regulators and legislators
relating to our out-of-network benefit payment practices.
It is
reasonably possible that others could initiate additional litigation or
additional regulatory action against us with respect to our benefit payment
practices.
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 themselves against the claims brought in 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
and/or group insurance claims, rescission of insurance coverage, patent
infringement and other intellectual property litigation 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 vigorously defend ourselves
against the claims brought in these matters.
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, the Office of the Inspector General, and other state and federal
authorities, including the investigation by, and subpoenas and requests from,
attorneys general and others described above under “Out-of-Network Benefit
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, pharmacy benefit management practices 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.
Our
operations are conducted in three business segments: Health Care, Group
Insurance and Large Case Pensions. Our Corporate Financing segment is
not a business segment. It is added to our business segments in order
to reconcile to our consolidated results. The Corporate Financing
segment includes interest expense on our outstanding debt and, beginning on
January 1, 2009, the financing components of our pension and other
postretirement benefit plan expense (the service cost component of this expense
is allocated to our business segments). Prior periods have been
reclassified to reflect this change.
Summarized
financial information for our segments for the three months ended March 31, 2009
and 2008 was as follows:
|
|
Health
|
|
|
Group
|
|
|
Large
Case
|
|
|
Corporate
|
|
|
Total
|
|
(Millions)
|
|
Care
|
|
|
Insurance
|
|
|
Pensions
|
|
|
Financing
|
|
|
Company
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
7,854.6 |
|
|
$ |
463.1 |
|
|
$ |
52.6 |
|
|
$ |
- |
|
|
$ |
8,370.3 |
|
Operating
earnings (loss) (1)
|
|
|
469.4 |
|
|
|
42.1 |
|
|
|
9.2 |
|
|
|
(78.1 |
) |
|
|
442.6 |
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from external customers
|
|
$ |
7,050.5 |
|
|
$ |
448.5 |
|
|
$ |
55.0 |
|
|
$ |
- |
|
|
$ |
7,554.0 |
|
Operating
earnings (loss) (1)
|
|
|
438.6 |
|
|
|
34.2 |
|
|
|
8.3 |
|
|
|
(11.5 |
) |
|
|
469.6 |
|
(1)
|
Operating
earnings (loss) excludes net realized capital gains or losses described in
the reconciliation below.
|
A
reconciliation of operating earnings to net income for the three months ended
March 31, 2009 and 2008 was as follows:
(Millions)
|
|
2009
|
|
|
2008
|
|
Operating
earnings
|
|
$ |
442.6 |
|
|
$ |
469.6 |
|
Net
realized capital losses
|
|
|
(4.8 |
) |
|
|
(38.0 |
) |
Net
income
|
|
$ |
437.8 |
|
|
$ |
431.6 |
|
14.
|
Discontinued
Products
|
Prior to
1993, we sold single-premium annuities (“SPAs”) and guaranteed investment
contracts (“GICs”), primarily to employer sponsored pension plans. In
1993, we discontinued selling these products, and now we refer to these products
as discontinued products.
We
discontinued selling these products because they were generating losses for us
and we projected that they would continue to generate future losses over their
life (which is greater than 30 years), so we established a reserve for
anticipated future losses at the time of discontinuance. This reserve
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 these
products and the cash flows expected to be required to meet the obligations of
the outstanding contracts. Because we projected anticipated cash
shortfalls in our discontinued products, at the time of discontinuance we
established a receivable from Large Case Pensions’ continuing products (which is
eliminated in consolidation).
Key
assumptions in setting this reserve include future investment results, payments
to retirees, mortality and retirement rates and the cost of asset management and
customer service. In 1997, we began the use of a bond default
assumption to reflect historical default experience. In 1995, we
modified the mortality tables used in order to reflect a more up-to-date 1994
Uninsured Pensioner’s Mortality table. Other than these changes,
since 1993, there have been no significant changes to the assumptions underlying
the reserve.
We review
the adequacy of this reserve quarterly based on actual experience. As
long as our expectation of future losses remains consistent with prior
projections, the results of the discontinued products are applied to the reserve
and do not affect net income. However, if actual or expected future
losses are greater than we currently estimate, we may have to increase the
reserve, which could adversely impact net income. If actual or
expected future losses are less than we currently estimate, we may have to
decrease the reserve, which could favorably impact net income. The
reserve for anticipated future losses is included in future policy benefits on
our balance sheets.
The
activity in the reserve for anticipated future losses on discontinued products
for the three months ended March 31, 2009 and 2008 was as follows
(pretax):
(Millions)
|
|
2009
|
|
|
2008
|
|
Reserve,
beginning of period
|
|
$ |
790.4 |
|
|
$ |
1,052.3 |
|
Operating
losses
|
|
|
(13.9 |
) |
|
|
(9.2 |
) |
Net
realized capital (losses) gains
|
|
|
(9.4 |
) |
|
|
2.0 |
|
Reserve,
end of period
|
|
$ |
767.1 |
|
|
$ |
1,045.1 |
|
During
the first quarter of 2009, our discontinued products reflected an operating loss
and net realized capital losses, both attributable to the unfavorable investment
conditions that existed from the latter half of 2008 through the first quarter
of 2009. We have evaluated the operating losses in 2009 against our
expectations of future cash flows assumed in estimating the reserve and do not
believe an adjustment to the reserve is required at March 31, 2009.
Assets
and liabilities supporting discontinued products at March 31, 2009 and December
31, 2008 were as follows: (1)
(Millions)
|
|
2009
|
|
|
2008
|
|
Assets:
|
|
|
|
|
|
|
Debt
and equity securities available-for-sale
|
|
$ |
2,154.4 |
|
|
$ |
2,382.4 |
|
Mortgage
loans
|
|
|
573.1 |
|
|
|
585.8 |
|
Other
investments
|
|
|
619.6 |
|
|
|
666.9 |
|
Total
investments
|
|
|
3,347.1 |
|
|
|
3,635.1 |
|
Other
assets
(2)
|
|
|
314.3 |
|
|
|
133.4 |
|
Collateral
received under securities loan agreements
|
|
|
107.3 |
|
|
|
150.7 |
|
Current
and deferred income taxes
|
|
|
84.4 |
|
|
|
82.2 |
|
Receivable
from continuing products (3)
|
|
|
442.7 |
|
|
|
436.0 |
|
Total
assets
|
|
$ |
4,295.8 |
|
|
$ |
4,437.4 |
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Future
policy benefits
|
|
$ |
3,407.5 |
|
|
$ |
3,446.4 |
|
Policyholders'
funds
|
|
|
13.9 |
|
|
|
16.7 |
|
Reserve
for anticipated future losses on discontinued products
|
|
|
767.1 |
|
|
|
790.4 |
|
Collateral
payable under securities loan agreements
|
|
|
107.3 |
|
|
|
150.7 |
|
Other
liabilities
(2)
|
|
|
- |
|
|
|
33.2 |
|
Total
liabilities
|
|
$ |
4,295.8 |
|
|
$ |
4,437.4 |
|
(1)
|
Assets
supporting the discontinued products are distinguished from assets
supporting continuing products.
|
(2)
|
Net
unrealized capital losses on debt securities available-for-sale are
included in other assets at March 31, 2009 and other liabilities at
December 31, 2008 and are not reflected in consolidated shareholders’
equity.
|
(3)
|
The
receivable from continuing products is eliminated in
consolidation.
|
Distributions
on discontinued products for the three months ended March 31, 2009 and 2008 were
as follows:
(Millions)
|
|
2009
|
|
|
2008
|
|
Scheduled
contract maturities, settlements and benefit payments
|
|
$ |
113.2 |
|
|
$ |
113.1 |
|
Participant-directed
withdrawals
|
|
|
- |
|
|
|
.1 |
|
Cash
required to fund these distributions was provided by earnings and scheduled
payments on, and sales of, invested assets.
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
March 31, 2009, the related consolidated statements of income, shareholders’
equity and cash flows for the three-month periods ended March 31, 2009 and 2008.
These 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, 2008, 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 27,
2009, 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, 2008, 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
April 29,
2009
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 March 31,
2009 and December 31, 2008 and results of operations for the three months ended
March 31, 2009 and 2008. 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 2008 Annual Report on Form 10-K (the “2008 Annual
Report”). This Overview is qualified in its entirety by the full
MD&A.
Summarized
Results for the Three Months Ended March 31, 2009 and 2008:
(Millions)
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
Health
Care
|
|
$ |
7,946.5 |
|
|
$ |
7,116.0 |
|
Group
Insurance
|
|
|
531.2 |
|
|
|
482.9 |
|
Large
Case Pensions
|
|
|
137.0 |
|
|
|
139.8 |
|
Total
revenue
|
|
|
8,614.7 |
|
|
|
7,738.7 |
|
Net
income
|
|
|
437.8 |
|
|
|
431.6 |
|
Business
Segment operating earnings:
(1)
|
|
|
|
|
|
|
|
|
Health
Care
|
|
|
469.4 |
|
|
|
438.6 |
|
Group
Insurance
|
|
|
42.1 |
|
|
|
34.2 |
|
Large
Case Pensions
|
|
|
9.2 |
|
|
|
8.3 |
|
Cash
flows from operations
|
|
|
826.3 |
|
|
|
897.6 |
|
(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 21 for a discussion of non-GAAP
measures. Refer to pages 21, 24 and 25 for a reconciliation of
operating earnings to net income for Health Care, Group Insurance and
Large Case Pensions, respectively.
|
Our business segment
operating earnings for the three months ended March 31, 2009, compared to the
corresponding period in 2008, reflect continued growth in our Health Care
business. The changes in our net income primarily reflect
growth in revenue from increases in membership levels and premium rate increases
for renewing membership in 2009 which was largely offset by higher pension plan
and other postretirement benefit plan (“OPEB”) expenses due to 2008 investment
losses experienced by the assets supporting our pension
obligations. We experienced membership growth in both our
administrative services contract (“ASC”) (where the plan sponsor assumes all or
a majority of the risk for medical and dental care costs) and Insured (where we
assume all or a majority of the risk for medical and dental care costs)
products. At March 31, 2009, we
served approximately 19.1 million medical members (consisting of approximately
33% Insured members and 67% ASC members), 14.5 million dental members and 11.2
million pharmacy members.
We
continued to generate strong cash flows from operations in the first quarter of
2009. These cash flows funded ordinary course operating
activities. We also continued our share repurchase program during the
first quarter of 2009, repurchasing approximately 10 million shares of our
common stock at a cost of approximately $277 million.
Executive
Management Update
Gery
J. Barry, Chief Strategy Officer, will be leaving Aetna to pursue other
interests. The strategic planning function will report to Joseph M.
Zubretsky, Executive Vice President and Chief Financial
Officer.
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 Condensed Notes to Consolidated Financial
Statements on page 16. 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 Corporate Financing
segment is not a business segment. It is added to our business
segments to reconcile to our consolidated results. The Corporate
Financing segment includes interest expense on our outstanding debt and,
beginning in 2009, the financing components of our pension plan and OPEB plan
expense (the service cost component of this expense is allocated to our business
segments). Prior periods have been reclassified to reflect this
change.
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.
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 (“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. 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 Months Ended March 31, 2009 and 2008:
(Millions)
|
|
2009
|
|
|
2008
|
|
Premiums:
|
|
|
|
|
|
|
Commercial
|
|
$ |
5,322.0 |
|
|
$ |
4,883.4 |
|
Medicare
|
|
|
1,461.1 |
|
|
|
1,227.5 |
|
Medicaid
|
|
|
209.1 |
|
|
|
142.6 |
|
Total
premiums
|
|
|
6,992.2 |
|
|
|
6,253.5 |
|
Fees
and other revenue
|
|
|
862.4 |
|
|
|
797.0 |
|
Net
investment income
|
|
|
97.7 |
|
|
|
87.0 |
|
Net
realized capital losses
|
|
|
(5.8 |
) |
|
|
(21.5 |
) |
Total
revenue
|
|
|
7,946.5 |
|
|
|
7,116.0 |
|
Health
care costs
|
|
|
5,804.2 |
|
|
|
5,086.2 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
299.1 |
|
|
|
279.3 |
|
General
and administrative expenses
|
|
|
1,101.7 |
|
|
|
1,066.1 |
|
Total
operating expenses
|
|
|
1,400.8 |
|
|
|
1,345.4 |
|
Amortization
of other acquired intangible assets
|
|
|
22.8 |
|
|
|
26.1 |
|
Total
benefits and expenses
|
|
|
7,227.8 |
|
|
|
6,457.7 |
|
Income
before income taxes
|
|
|
718.7 |
|
|
|
658.3 |
|
Income
taxes
|
|
|
255.1 |
|
|
|
233.7 |
|
Net
income
|
|
$ |
463.6 |
|
|
$ |
424.6 |
|
The table
presented below reconciles operating earnings to net income reported in
accordance with GAAP for the three months ended March 31, 2009 and
2008:
(Millions)
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
463.6 |
|
|
$ |
424.6 |
|
Net
realized capital losses
|
|
|
5.8 |
|
|
|
14.0 |
|
Operating
earnings
|
|
$ |
469.4 |
|
|
$ |
438.6 |
|
Operating
earnings for the first quarter of 2009 when compared to the corresponding period
in 2008 reflect growth in premiums and fees and other revenue, higher net
investment income, as well as continued operating expense efficiencies (total
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 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 months ended March 31, 2009 and 2008, our MBRs by
product were as follows:
|
|
2009
|
|
|
2008
|
|
Commercial
|
|
|
81.7 |
% |
|
|
79.8 |
% |
Medicare
|
|
|
86.8 |
% |
|
|
86.0 |
% |
Medicaid
|
|
|
90.7 |
% |
|
|
92.8 |
% |
Total
|
|
|
83.0 |
% |
|
|
81.3 |
% |
Refer to
our discussion of Commercial and Medicare results that follows for an
explanation of the
changes in our MBR.
The
operating results of our Commercial products continued to grow during the three
months ended March 31, 2009
Commercial
premiums increased approximately $439 million for the three months ended March
31, 2009, when compared to the corresponding period in 2008. This
increase reflects premium rate increases on renewing business and an increase in
membership levels (refer to Membership page 24).
Our
Commercial MBR was 81.7% and 79.8% for the three months ended March 31, 2009 and
2008, respectively. For the three months ended March 31, 2009, we had
approximately $38 million of unfavorable development of prior period health care
cost estimates. This development was driven by what we believe
is unusually high paid claims activity in the first quarter primarily
related to the fourth quarter of 2008. We had no significant
development of prior period health care cost estimates for the three months
ended March 31, 2008. Taking this development into account, the
Commercial MBR for the three months ended March 31, 2009 was higher than
the corresponding period in 2008, reflecting a percentage increase in our per
member health care costs that outpaced the percentage increase in per
member premiums. The increase in per member health care costs was
driven primarily by increased
intensity of facility services across products (without attendant increases in
key utilization metrics) and higher than expected impacts from layoffs and
members' election of benefits under the Consolidated Omnibus Budget
Reconciliation Act of 1986 ("COBRA"). Refer to Critical Accounting
Estimates – Health Care Costs Payable in our 2008 Annual Report for a discussion
of Health Care Costs Payable.
Medicare
results for the first quarter 2009 reflect growth from the corresponding period
in 2008
Medicare
premiums increased approximately $234 million for the three months ended March
31, 2009, compared to the corresponding period in
2008. This increase primarily reflects growth in our group
private-fee-for-service (“PFFS”) Medicare Advantage plans, increases in
supplemental premiums across all our Medicare Advantage products, rate increases
from the Centers for Medicare & Medicaid Services (“CMS”) and true-ups of premium
estimates for specified risk adjustments from
CMS.
The Medicare MBR for the
first quarter of 2009 was 86.8%, compared to 86.0% for the corresponding
period in 2008. For the three months ended March 31, 2009, we had a small amount
of unfavorable development of prior period health care cost estimates due to a
higher risk profile of the book of business that was largely offset by higher
premium estimates for specified risk adjustments from CMS. We had no
significant development of prior period Medicare health care cost estimates in
the three months ended March 31, 2008. Taking this development into
account, the Medicare MBR for the three months ended March 31, 2009 was slightly
higher than the corresponding period in 2008, reflecting a percentage increase
in per member health care costs that slightly outpaced the percentage increase
in per member premiums.
Other
Sources of Revenue
Fees and
other revenue increased approximately $65 million for the three months ended
March 31, 2009, compared to the corresponding period in 2008, reflecting growth
in ASC membership.
Membership
Health
Care’s membership at March 31, 2009 and 2008 was as follows:
|
|
2009
|
|
|
2008
|
|
(Thousands)
|
|
Insured
|
|
|
ASC
|
|
|
Total
|
|
|
Insured
|
|
|
ASC
|
|
|
Total
|
|
Medical:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
5,656 |
|
|
|
12,060 |
|
|
|
17,716 |
|
|
|
5,387 |
|
|
|
10,901 |
|
|
|
16,288 |
|
Medicare
|
|
|
419 |
|
|
|
- |
|
|
|
419 |
|
|
|
350 |
|
|
|
14 |
|
|
|
364 |
|
Medicaid
|
|
|
284 |
|
|
|
647 |
|
|
|
931 |
|
|
|
174 |
|
|
|
641 |
|
|
|
815 |
|
Total
Medical Membership
|
|
|
6,359 |
|
|
|
12,707 |
|
|
|
19,066 |
|
|
|
5,911 |
|
|
|
11,556 |
|
|
|
17,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-Directed
Health Plans
(1)
|
|
|
|
|
|
|
|
|
|
|
1,795 |
|
|
|
|
|
|
|
|
|
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dental:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
5,214 |
|
|
|
7,640 |
|
|
|
12,854 |
|
|
|
5,008 |
|
|
|
7,584 |
|
|
|
12,592 |
|
Medicare
and Medicaid
|
|
|
245 |
|
|
|
381 |
|
|
|
626 |
|
|
|
216 |
|
|
|
394 |
|
|
|
610 |
|
Network
Access (2)
|
|
|
- |
|
|
|
1,056 |
|
|
|
1,056 |
|
|
|
- |
|
|
|
964 |
|
|
|
964 |
|
Total
Dental Membership
|
|
|
5,459 |
|
|
|
9,077 |
|
|
|
14,536 |
|
|
|
5,224 |
|
|
|
8,942 |
|
|
|
14,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmacy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
9,997 |
|
|
|
|
|
|
|
|
|
|
|
9,746 |
|
Medicare
PDP (stand-alone)
|
|
|
|
|
|
|
|
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
369 |
|
Medicare
Advantage PDP
|
|
|
|
|
|
|
|
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
181 |
|
Medicaid
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
22 |
|
Total
Pharmacy Benefit Management Services
|
|
|
|
|
|
|
|
|
|
|
10,568 |
|
|
|
|
|
|
|
|
|
|
|
10,318 |
|
Mail
Order (3)
|
|
|
|
|
|
|
|
|
|
|
672 |
|
|
|
|
|
|
|
|
|
|
|
633 |
|
Total
Pharmacy Membership
|
|
|
|
|
|
|
|
|
|
|
11,240 |
|
|
|
|
|
|
|
|
|
|
|
10,951 |
|
(1)
|
Represents
members in consumer-directed health plans also included in Commercial
medical membership above.
|
(2)
|
Represents
members in products that allow these members access to our dental provider
network for a nominal fee.
|
(3)
|
Represents
members who purchased medications through our mail order pharmacy
operations during the first quarter of 2009 and 2008, respectively, and
are included in pharmacy membership
above.
|
Total
medical, dental and pharmacy membership at March 31, 2009 increased compared to
March 31, 2008. The increase in medical membership was primarily due
to growth in Commercial membership, driven by growth within existing
plan sponsors and new customers, net of lapses and Medicaid membership,
attributable to a new insured contract.
Total
dental membership increased in 2009 primarily due to membership growth from both
new and current customers.
Pharmacy
membership increased in 2009 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. 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 and supplemental group term life insurance, 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, (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 Months Ended March 31, 2009 and 2008:
(Millions)
|
|
2009
|
|
|
2008
|
|
Premiums:
|
|
|
|
|
|
|
Life
|
|
$ |
276.8 |
|
|
$ |
269.2 |
|
Disability
|
|
|
140.4 |
|
|
|
132.0 |
|
Long-term
care
|
|
|
18.2 |
|
|
|
22.1 |
|
Total
premiums
|
|
|
435.4 |
|
|
|
423.3 |
|
Fees
and other revenue
|
|
|
27.7 |
|
|
|
25.2 |
|
Net
investment income
|
|
|
64.1 |
|
|
|
64.0 |
|
Net
realized capital gains (losses)
|
|
|
4.0 |
|
|
|
(29.6 |
) |
Total
revenue
|
|
|
531.2 |
|
|
|
482.9 |
|
Current
and future benefits
|
|
|
375.6 |
|
|
|
375.9 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
23.4 |
|
|
|
24.5 |
|
General
and administrative expenses
|
|
|
68.4 |
|
|
|
63.8 |
|
Total
operating expenses
|
|
|
91.8 |
|
|
|
88.3 |
|
Amortization
of other acquired intangible assets
|
|
|
1.7 |
|
|
|
1.7 |
|
Total
benefits and expenses
|
|
|
469.1 |
|
|
|
465.9 |
|
Income
before income taxes
|
|
|
62.1 |
|
|
|
17.0 |
|
Income
taxes
|
|
|
16.0 |
|
|
|
2.0 |
|
Net
income
|
|
$ |
46.1 |
|
|
$ |
15.0 |
|
The table
presented below reconciles operating earnings to net income reported in
accordance with GAAP for the three months ended March 31, 2009 and
2008:
(Millions)
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
46.1 |
|
|
$ |
15.0 |
|
Net
realized capital (gains) losses
|
|
|
(4.0 |
) |
|
|
19.2 |
|
Operating
earnings
|
|
$ |
42.1 |
|
|
$ |
34.2 |
|
Operating
earnings for the three months ended March 31, 2009 increased compared to the
corresponding period in 2008 reflecting a higher underwriting margin (premiums
less current and future benefits) in our life products, partially offset by
lower underwriting margins in our disability products.
The group
benefit ratio was 86.3% for the three months ended March 31, 2009, compared to
88.8% for the corresponding period in 2008. The decrease in the group
benefit ratio for the three months ended March 31, 2009 compared to the
corresponding period in 2008 was primarily due to favorable life experience
partially offset by unfavorable disability experience.
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 Months Ended March 31, 2009 and 2008:
(Millions)
|
|
2009
|
|
|
2008
|
|
Premiums
|
|
$ |
49.7 |
|
|
$ |
51.9 |
|
Net
investment income
|
|
|
87.4 |
|
|
|
92.2 |
|
Other
revenue
|
|
|
2.9 |
|
|
|
3.1 |
|
Net
realized capital losses
|
|
|
(3.0 |
) |
|
|
(7.4 |
) |
Total
revenue
|
|
|
137.0 |
|
|
|
139.8 |
|
Current
and future benefits
|
|
|
127.7 |
|
|
|
133.0 |
|
General
and administrative expenses
|
|
|
.9 |
|
|
|
4.0 |
|
Total
benefits and expenses
|
|
|
128.6 |
|
|
|
137.0 |
|
Income
before income taxes
|
|
|
8.4 |
|
|
|
2.8 |
|
Income
taxes (benefits)
|
|
|
2.2 |
|
|
|
(.7 |
) |
Net
income
|
|
$ |
6.2 |
|
|
$ |
3.5 |
|
The table
presented below reconciles operating earnings to net income reported in
accordance with GAAP:
(Millions)
|
|
2009
|
|
|
2008
|
|
Net
income
|
|
$ |
6.2 |
|
|
$ |
3.5 |
|
Net
realized capital losses
|
|
|
3.0 |
|
|
|
4.8 |
|
Operating
earnings
|
|
$ |
9.2 |
|
|
$ |
8.3 |
|
Discontinued
Products in Large Case Pensions
Prior to
1993, we sold single-premium annuities (“SPAs”) and guaranteed investment
contracts (“GICs”), primarily to employer sponsored pension plans. In
1993, we discontinued selling these products, and now we refer to these products
as discontinued products.
We
discontinued selling these products because they were generating losses for us
and we projected that they would continue to generate future losses over their
life (which is greater than 30 years), so we established a reserve for
anticipated future losses at the time of discontinuance. We provide
additional information on this reserve, including key assumptions and other
important information, in Note 14 of Condensed Notes to Consolidated Financial
Statements beginning on page 17. Please refer to this note for
additional information.
The
operating summary for Large Case Pensions above includes revenues and expenses
related to our discontinued products with the exception of net realized capital
gains and losses which are recorded as part of current and future
benefits. Since we established a reserve for future losses on
discontinued products, as long as our expected future losses remain consistent
with prior projections, the operating results of our discontinued products are
applied against the reserve and do not impact operating earnings or net income
for Large Case Pensions. However, if actual or expected future losses
are greater than we currently estimate, we may have to increase the reserve,
which could adversely impact net income. If actual or expected future
losses are less than we currently estimate, we may have to decrease the reserve,
which could favorably impact net income. In those cases, we disclose
such adjustment separately in the operating summary. Management
reviews the adequacy of the discontinued products reserve
quarterly. The current reserve reflects management’s best estimate of
anticipated future losses.
The
activity in the reserve for anticipated future losses on discontinued products
for the three months ended March 31, 2009 and 2008 (pretax) was as
follows:
(Millions)
|
|
2009
|
|
|
2008
|
|
Reserve,
beginning of period
|
|
$ |
790.4 |
|
|
$ |
1,052.3 |
|
Operating
losses
|
|
|
(13.9 |
) |
|
|
(9.2 |
) |
Net
realized capital (losses) gains
|
|
|
(9.4 |
) |
|
|
2.0 |
|
Reserve,
end of period
|
|
$ |
767.1 |
|
|
$ |
1,045.1 |
|
During
the first quarter of 2009, our discontinued products reflected an operating loss
and net realized capital losses, both attributable to the unfavorable investment
conditions that existed from the latter half of 2008 through the first quarter
of 2009. We have evaluated the operating losses in 2009 against our
expectations of future cash flows assumed in estimating the reserve and do not
believe an adjustment to the reserve is required at March 31, 2009.
Assets
Managed by Large Case Pensions
At March
31, 2009 and 2008, Large Case Pensions assets under management consisted of the
following:
(Millions)
|
|
2009
|
|
|
2008
|
|
Assets
under management: (1)
|
|
|
|
|
|
|
Fully
guaranteed discontinued products
|
|
$ |
3,694.4 |
|
|
$ |
4,193.5 |
|
Experience-rated
|
|
|
4,239.8 |
|
|
|
4,374.7 |
|
Non-guaranteed
|
|
|
2,514.7 |
|
|
|
3,723.0 |
|
Total
assets under management
|
|
$ |
10,448.9 |
|
|
$ |
12,291.2 |
|
(1)
|
Excludes
net unrealized capital (losses) gains of $(266.7) million and $82.4
million at March 31, 2009 and 2008,
respectively.
|
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. For the quarter ended March 31, 2009 and 2008,
experience-rated contract holder and participant-directed withdrawals were as
follows:
(Millions)
|
|
2009
|
|
|
2008
|
|
Scheduled
contract maturities and benefit payments (1)
|
|
$ |
66.8 |
|
|
$ |
85.0 |
|
Contract
holder withdrawals other than scheduled contract maturities and benefit
payments
|
|
|
.4 |
|
|
|
20.1 |
|
Participant-directed
withdrawals
|
|
|
.9 |
|
|
|
.8 |
|
(1)
|
Includes
payments made upon contract maturity and other amounts distributed in
accordance with contract schedules.
|
INVESTMENTS
At March
31, 2009 and December 31, 2008, our investment portfolio consisted of the
following:
|
|
March
31,
|
|
|
December
31,
|
|
(Millions)
|
|
2009
|
|
|
2008
|
|
Debt
and equity securities available for sale
|
|
$ |
13,597.9 |
|
|
$ |
13,993.3 |
|
Mortgage
loans
|
|
|
1,653.9 |
|
|
|
1,679.9 |
|
Other
investments
|
|
|
1,156.0 |
|
|
|
1,196.2 |
|
Total
investments
|
|
$ |
16,407.8 |
|
|
$ |
16,869.4 |
|
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
March 31, 2009 and December 31, 2008:
|
March
31,
|
|
December
31,
|
(Millions)
|
2009
|
|
2008
|
Supporting
experience-rated products
|
$ 1,490.8
|
|
$ 1,582.8
|
Supporting
discontinued products
|
3,347.1
|
|
3,635.1
|
Supporting
remaining products
|
11,569.9
|
|
11,651.5
|
Total
investments
|
$ 16,407.8
|
|
$ 16,869.4
|
Debt
and Equity Securities
The debt
securities in our portfolio had an average quality rating of A+ at both March
31, 2009 and December 31, 2008, with approximately $4.1 billion and $4.3
billion, respectively, rated AAA. Total debt securities that were
rated below investment grade (that is, having a quality rating below BBB-/Baa3)
were $682 million and $640 million at March 31, 2009 and December 31, 2008,
respectively (of which 18% at both March 31, 2009 and December 31, 2008
supported our discontinued and experience-rated products).
At March
31, 2009 and December 31, 2008, we held approximately $501 million and $824
million, respectively, of municipal debt securities and $28 million and $64
million, respectively, of structured product debt securities that were
guaranteed by third parties, collectively representing approximately 3% and 5%,
respectively, of our total investments. These securities had an
average credit rating of AA- at both March 31, 2009 and December 31,
2008 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 3% of our debt and
equity securities at both March 31, 2009 and December 31, 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 March
31, 2009 and December 31, 2008, our debt and equity securities had net
unrealized losses of $743 million and $500 million, respectively, of which $278
million and $123 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 March 31, 2009 and December 31, 2008 due to
increases in credit spreads relative to interest rates on U.S. Treasury
securities in 2008 and through the first quarter of 2009 rather than unfavorable
changes in the credit quality of such securities. We have reviewed
these individual debt securities for OTTI (see below) and have the intent and
ability to hold these securities until market recovery.
Refer to
Note 5 of Condensed Notes to Consolidated Financial Statements beginning on page
7 for details of net unrealized capital gains and losses by major security type,
as well as details on our debt and equity securities with unrealized losses at
March 31, 2009 and December 31, 2008. 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 in our results of
operations. Accounting for OTTI of our investment securities is
considered a critical accounting estimate. Refer to Critical
Accounting Estimates - Other-Than-Temporary Impairment of Investment Securities
in our 2008 Annual Report for additional information.
Net Realized Capital Gains and
Losses
Net
realized capital losses were $5 million and $59 million for the three months
ended March 31, 2009 and 2008, respectively. Included in net
realized capital losses were $38 million and $80 million for the first quarter
of 2009 and 2008, respectively, of 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 through the first quarter
of 2009. During 2008, significant declines in the U.S. housing market
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 the
continued downturn in the economy resulted in credit spreads widening during
2008 and through the first quarter of 2009.
We had no
individually material realized capital losses on debt or equity securities that
impacted our results of operations during the first quarter of 2009 or
2008. Refer to Critical Accounting Estimates - Other-Than-Temporary
Impairments of Investment Securities in our 2008 Annual Report for additional
information.
Mortgage
Loans
Our
mortgage loan portfolio (which is secured by commercial real estate) represented
10% of our total invested assets at March 31, 2009 and December 31,
2008. There were no specific impairment reserves on these loans at
March 31, 2009 or December 31, 2008.
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, futures contracts and credit default
swaps. 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.
On a
quarterly basis, we review 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 near-term 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 March 31, 2009. Refer to the MD&A in our 2008 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, contract withdrawals, operating expenses and share
repurchases.
Presented
below is a condensed statement of cash flows for the three months ended March
31, 2009 and 2008. We present net cash flows used for operating
activities 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)
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Health
Care and Group Insurance (including Corporate Financing)
|
|
$ |
875.7 |
|
|
$ |
960.6 |
|
Large
Case Pensions
|
|
|
(49.4 |
) |
|
|
(63.0 |
) |
Net
cash provided by operating activities
|
|
|
826.3 |
|
|
|
897.6 |
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Health
Care and Group Insurance
|
|
|
(180.3 |
) |
|
|
(557.0 |
) |
Large
Case Pensions
|
|
|
295.1 |
|
|
|
39.0 |
|
Net
cash provided by (used for) investing activities
|
|
|
114.8 |
|
|
|
(518.0 |
) |
Net
cash used for financing activities
|
|
|
(373.3 |
) |
|
|
(262.9 |
) |
Net
increase in cash and cash equivalents
|
|
$ |
567.8 |
|
|
$ |
116.7 |
|
Cash
Flow Analysis
Cash
flows provided by operating activities for Health Care and Group Insurance were
approximately $876 million in the three months ended March 31, 2009 and $961
million in the three months ended March 31, 2008. Cash flows for the
three months ended March 31, 2008 reflect the receipt of approximately $127
million in premium stabilization funds from a large customer.
We
repurchased approximately 10 million shares of common stock at a cost of
approximately $277 million during the three months ended March 31, 2009 and
approximately 13 million shares of common stock at a cost of approximately $600
million during the three months ended March 31, 2008. At March 31,
2009, the capacity remaining under our share repurchase programs was
approximately $1.1 billion. Refer to Note 9 of Condensed Notes to
Consolidated Financial Statements on page 11 for more information.
Other
Liquidity Information
While our
Board reviews our common stock dividend annually, we currently intend to
maintain an annual dividend of $.04 per common share. Among the
factors considered by our Board in determining the amount of dividends
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 three months ended
March 31, 2009 was $493 million.
Our
committed short-term borrowing capacity consists of a $1.5 billion revolving
credit facility which terminates in March 2013 (the “Facility”). 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 the period ending March 31,
2009.
Our total
debt to capital ratio (total debt divided by shareholders’ equity plus total
debt) was approximately 31% at March 31, 2009. 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 $40 million for the three months ended March 31, 2009
compared to $35 million for the corresponding period in 2008. The
increase in interest expense for the three months ended March 31, 2009 related
to higher overall average long-term debt levels as a result of our issuance of
senior notes in September 2008.
Other
Common Stock Transactions
On
February 13, 2009, approximately 5.2 million stock appreciation rights, .5
million restricted stock units and .7 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 April
28, 2009, 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) (1)
|
AMB-2
|
|
|
F1 |
|
|
|
P-2 |
|
|
|
A-2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALIC
(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 2008 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
broad-based legislative and regulatory proposals that have or could materially
impact various aspects of the health care system. For
example:
|
·
|
Addressing
the affordability and availability of health insurance, including reducing
the number of uninsured, is a major initiative of President Obama and the
U.S. Congress, and proposals that would address these issues are pending
in many states. We anticipate that similar measures will be
considered by the U.S. Congress during 2009. The proposals
vary, and include a public health plan that would compete with us and
other private health plans for individual and small business customers,
individual insurance requirements, the expansion of eligibility under
existing Medicaid and/or Federal Employees Health Benefit Plan programs,
minimum medical benefit ratios for health plans, mandatory issuance of
insurance coverage and requirements that would limit the ability of health
plans and insurers to vary premiums based on assessments of underlying
risk. While certain of these measures would adversely affect
us, at this time we cannot predict the extent of the impact of these
proposals on our business or results of
operations.
|
|
·
|
On
February 17, 2009, the American Recovery and Reinvestment Act of 2009
(“ARRA”) was enacted into law. ARRA includes a temporary subsidy for
health care continuation coverage issued pursuant to COBRA for individuals
who were involuntarily terminated from employment on or after September 1,
2008 through December 31, 2009. If an individual is
involuntarily terminated from employment (for reasons other than gross
misconduct) during this 16-month period, the individual may elect COBRA
coverage and, for a period of up to nine months, receive a subsidy from
his or her employer equal to 65% of the otherwise applicable COBRA premium
charged to the employee. The employer is entitled to apply the
amount of premium assistance it pays as an offset against its payroll
taxes. The availability of this subsidy may cause more people
to elect COBRA coverage from us than we have assumed, which could cause
unexpected increases in our medical
costs.
|
|
·
|
ARRA
also expands and strengthens the privacy and security provisions of the
Health Insurance Portability and Accountability Act (“HIPAA”) and imposes
additional limits on the use and disclosure of Protected Health
Information (“PHI”). Among other things, ARRA requires us and
other covered entities to report any unauthorized release or use of or
access to PHI to impacted individuals and to the Department of Health and
Human Services, regardless of risk of harm to the
individuals. ARRA also requires business associates (e.g.,
entities that provide services to health plans, such as electronic claims
clearinghouses, print and fulfillment vendors, consultants, and us for our
ASC customers) to comply with certain HIPAA provisions. ARRA
also establishes greater civil and criminal penalties for covered entities
and business associates who fail to comply with HIPAA’s provisions and
requires the U.S. Department of Health and Human Services to issue
regulations implementing its privacy and security
enhancements. We will assess the impact of these regulations on
our business when they are issued.
|
|
·
|
In
2008, the U.S. Congress reduced funding for Medicare Advantage plans
beginning in 2010 and imposed new marketing requirements on Medicare
Advantage and PDP plans beginning in
2009.
|
Refer to
Regulatory Environment in our 2008 Annual Report for additional information on
the regulation of our business and the health care system.
FORWARD-LOOKING
INFORMATION/RISK FACTORS
The
following risk factors supplement the Forward-Looking Information/Risk Factors
portion of our 2008 Annual Report. You should read that section of
our 2008 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.
Our
business and profitability may continue to be adversely affected by prevailing
economic conditions, and there can be no assurance that future health care costs
will not continue to exceed our projections.
As
described in the Risk Factors section of our 2008 Annual Report, adverse
economic conditions and unanticipated increases in our health care costs can
significantly and adversely affect our businesses and profitability in a number
of ways. The current economic environment is challenging and less
predictable than recently experienced, causing unanticipated increases and
volatility in our health care costs. For example, we had
approximately $38 million of unfavorable development of prior period Commercial
health care cost estimates in the three months ended March 31,
2009. As a result of these increases and volatility, our ability to
accurately detect, forecast, manage and reserve for our and our self-insured
customers’ medical cost trends and future health care costs may be impaired, and
our profits are particularly sensitive to the accuracy of our projections of
those trends and costs. Furthermore, reductions in force by our
customers in excess of, or occurring at a faster rate than, those we project
could reduce both our revenue and membership below our projected levels and
cause unanticipated increases in our health care costs because, for example, our
business associated with members who have elected to receive benefits under
COBRA typically has an MBR that is significantly higher than our Commercial
average. In addition, the operating results associated with our COBRA
membership may be subject to a high degree of variability until we are able to
gain more experience with the expected increase in COBRA membership resulting
from the ARRA subsidy described in Regulatory Environment on page
31. There can be no assurance that our health care costs, business
and profitability will not be adversely affected by these economy-related
conditions or other factors.
In
addition, legislative and regulatory developments may adversely affect our
business and the health care system. Refer to Regulatory Environment
on page 31.
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Refer to
the information contained in MD&A – Investments beginning on page 27 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
March 31, 2009 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 March 31, 2009 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 beginning on page 31 of MD&A 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 March 31, 2009:
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
|
|
January
1, 2009 - January 31, 2009
|
|
|
3.1 |
|
|
$ |
28.82 |
|
|
|
3.1 |
|
|
$ |
524.2 |
|
February
1, 2009 - February 28, 2009
|
|
|
2.8 |
|
|
|
30.38 |
|
|
|
2.8 |
|
|
|
1,187.8 |
|
March
1, 2009 - March 31, 2009
|
|
|
4.5 |
|
|
|
22.61 |
|
|
|
4.5 |
|
|
|
1,087.2 |
|
Total
|
|
|
10.4 |
|
|
$ |
26.60 |
|
|
|
10.4 |
|
|
|
N/A |
|
On June
27, 2008 and February 27, 2009, we announced that our Board authorized two share
repurchase programs for the repurchase of up to $750 million each of our common
stock. During the first quarter of 2009, we repurchased approximately
10 million shares of common stock at a cost of approximately $277
million. At March 31, 2009, we had remaining authorization to
repurchase an aggregate of up to approximately $1.1 billion of common stock
remaining under the Board authorizations.
Exhibits
to this Form 10-Q are as follows:
10
|
Material
contracts
|
|
|
10.1
|
Amended
and Restated Employment Agreement, dated as of December 21, 2004, between
Active Health Management, Inc. and Lonny Reisman, M.D.
|
|
|
10.2
|
Employment
Agreement Amendment, dated as of May 12, 2005, among Aetna Inc., Active
Health Management, Inc. and Lonny Reisman, M.D.
|
|
|
10.3
|
Amendment
No. 2 to Employment Agreement, dated as of December 31, 2008, between
Aetna Inc. and Lonny Reisman, M.D.
|
|
|
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 April
29, 2009 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: April
29, 2009
|
By: /s/ Rajan Parmeswar
|
|
Rajan
Parmeswar
|
|
Vice
President, Controller and
|
|
Chief
Accounting Officer
|
INDEX
TO EXHIBITS
Exhibit
|
|
Filing
|
Number
|
Description
|
Method
|
10
|
Material
contracts
|
|
|
|
|
10.1
|
Amended
and Restated Employment Agreement, dated as of December 21, 2004, between
Active Health Management, Inc. and Lonny Reisman, M.D.
|
Electronic
|
|
|
|
10.2
|
Employment
Agreement Amendment, dated as of May 12, 2005, among Aetna Inc., Active
Health Management, Inc. and Lonny Reisman, M.D.
|
Electronic
|
|
|
|
10.3
|
Amendment
No. 2 to Employment Agreement, dated as of December 31, 2008, between
Aetna Inc. and Lonny Reisman, M.D.
|
Electronic
|
|
|
|
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 April
29, 2009 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
36
_______________________________________________________________________________________________________________________________________________________________________________