AET
#Thank you, <UNK>, and good morning, everyone
Earlier today, we reported first quarter 2017 adjusted earnings of $939 million and adjusted earnings per share of $2.71. These results represent year-over-year growth of 14% and 17%, respectively, and continue to be supported by strong cash flow, balance sheet and adjusted margins
I'll begin with some comments on overall performance
Our medical membership of 22.4 million is approximately 100,000 higher than the top end of our previously projected range for March 31, driven by better-than-anticipated Commercial ASC growth and lower-than-projected Medicaid membership declines
Adjusted revenue was $15.5 billion, a modest year-over-year decrease, driven by lower membership in our ACA-compliant individual and small group products and the 2017 suspension of the health insurer fee
These dynamics were partially offset by higher Commercial premium yields and membership growth in our Government business
From an adjusted pre-tax margin perspective, our businesses are performing quite well
Our adjusted pre-tax margin was 10%, a strong result and above the high end of our target adjusted margin range
Our first quarter total health medical benefit ratio was 82.6%, a strong result that benefited from continued moderate medical cost trends and favorable prior years reserve development
We achieved this result despite the impact of a $110 million premium deficiency reserve associated with our individual Commercial products
Our adjusted expense ratio was 16%, a 200 basis point improvement over the first quarter of 2016, driven primarily by the suspension of the health insurer fee in 2017 and execution of our expense management initiatives
Relative to our previous projections, this metric benefited in the quarter from the timing of previously planned spending, which we now expect to occur during the remainder of the year
From a balance sheet perspective, we remain confident in the adequacy of our reserves
We experienced favorable prior-years reserve development in the quarter across all of our core products primarily attributable to fourth quarter 2016 dates of service
And our days claims payable were 53 days at the end of the quarter, a sequential decrease of approximately one day
Turning to cash flow and capital, healthcare and group insurance cash flows were approximately $980 million in the quarter
During the quarter, we initiated a $3.3 billion accelerated share repurchase program, which retired 20.9 million shares
We returned approximately $88 million to shareholders through our quarterly shareholder dividend
We also announced the doubling of our quarterly shareholder dividend which took effect last month
In short, we are pleased with our first quarter results and the continued successful execution of our strategy to become a more consumer-focused company
I will now discuss the key drivers of our first quarter results in greater detail
Beginning with our Government business, we delivered another solid quarter, continuing our momentum from 2016. We grew our first quarter 2017 Government premiums by over 9% compared to the prior-year period, achieving a quarterly record of $7.1 billion
This quarter marks the first time our Government premiums have exceeded our Commercial premiums
From a membership perspective, we grew by 107,000 Medicare members, led by growth of 99,000 in individual Medicare Advantage
Medicaid membership declined by 90,000 members in the quarter related to our exit of the Nebraska Medicaid contract at the beginning of the year
This was a better result than previously projected due to the delay in changes related to our Pennsylvania Medicaid contract
Our Government medical benefit ratio was 85.3%, a continuation of the strong results we achieved in this business in 2016 and a very good start to the year
Shifting to our Commercial business, the strong momentum of 2016 continued in the first quarter with our Commercial ASC membership increase of approximately 219,000 members, as large group Commercial membership gains outpaced our previous projection
Increased sales drove this improvement, a confirmation that our value proposition is resonating in the marketplace, particularly with public and labor customers
In our Commercial Insured business, membership decreased in the quarter, largely the result of declining ACA-compliant individual and small group membership
As a result of actions taken to reduce our footprint in 2017, our individual business now represents less than 2% of total adjusted revenue
Our Commercial medical benefit ratio was 79.4% for the quarter, a very good result despite continued pressure from our individual Commercial products
Our group Commercial products performed very well in the quarter, benefiting from moderate medical cost trends and favorable prior year's reserve development
Based on first quarter results, we continue to project that our 2017 non-ACA core Commercial medical cost trends will be in the range of 6% to 7%
With respect to our individual Commercial products, we continue to face headwinds related to profitability
From a membership perspective, we ended the quarter with 255,000 individual Commercial members, down from 964,000 at year-end 2016. This result is 15,000 members higher than our previous projection
Based on our current view of membership in these products, we believe the risk pool that we have retained from last year and attracted during this year's annual enrollment has higher cost levels than we had previously projected
As a result of our higher membership, and an updated view of the health status of our current membership, we recognized a $110 million PDR reflecting our expectation for greater losses than previously anticipated for the 2017 policy year
It is important to note that despite this headwind, we continue to project that 2017 losses on individual Commercial products will be significantly less than those reported in 2016. We expect that the first quarter will mark the high point for our individual Commercial membership, as we project attrition throughout the remainder of 2017. This is consistent with our experience in recent years
Looking beyond 2017, we continue to evaluate our footprint with a view towards significantly reducing our exposure to individual Commercial products in 2018. We have already disclosed our planned 2018 exit from one of our 2017 state-based exchanges and intend to communicate other 2018 footprint decisions when appropriate
Moving on to the balance sheet
Our financial position, capital structure and liquidity all continue to be very strong
At March 31, we had a debt to total capitalization ratio of approximately 39.8%
Looking at cash and investments at the parent, we started the quarter with approximately $15.1 billion
Net subsidiary dividends to the parent were $785 million
We repaid $11.3 billion in debt in the quarter, including $10.2 billion related to the Humana deal financing
We paid $1.2 billion in deal-related termination fees
We paid a shareholder dividend of $88 million
We used $3.3 billion in the quarter for our accelerated share repurchase program
And after other sources and uses, we ended the quarter with approximately $100 million of cash at the parent
Our basic share count was approximately 332 million at March 31. As a result of our first quarter performance, we are increasing our 2017 adjusted earnings per share guidance to a range of $8.80 to $9 per share
The midpoint of this range represents a $0.35 increase relative to our previous projection of at least $8.55 per share, a meaningful increase, especially when viewed in light of an approximate $0.20 headwind from our individual Commercial products
Our increased adjusted EPS outlook reflects our favorable first quarter results, including the effect of favorable prior-year's reserve development as well as the impact of our accelerated share repurchase program
Partially offsetting these benefits are the updated outlook for our individual Commercial products and the increased targeted investment spending to drive future growth, primarily related to government-sponsored programs
However, certain risks remain that temper our outlook at this point in the calendar, including the ever-present concern that medical cost trends could increase more than we have projected, low visibility at this juncture of the year into our ability to achieve our updated outlook for individual Commercial products, and the potential for the health insurer fee to be permanently repealed during 2017. Our updated 2017 guidance is influenced by the following additional drivers
Based on our first quarter membership results, we project that our year-end medical membership will be approximately 22.2 million members, as declines in Medicaid and small group Commercial during the balance of the year are partially offset by growth in Commercial ASC and Medicare membership over the remainder of the year
As we consider the stronger-than-projected start to the year and our current membership view, we are increasing our adjusted revenue projection for the year and now project that we will deliver approximately $61 billion in 2017 adjusted revenue
Based on our strong first quarter results, we now project that our full-year total health care medical benefit ratio will be in the range of 84%, plus or minus 50 basis points
We now project that our adjusted expense ratio will be approximately 16.9% for the full year, up approximately 15 basis points compared to the top end of our previous guidance range
This increase is driven by the increase in targeted growth initiative investments now contemplated in 2017. We continue to project adjusted pre-tax margin to be approximately 8%, consistent with our high single digit target
We now project adjusted earnings will be approximately $3 billion, and we continue to project full-year excess cash available at the parent to be approximately $4 billion
Finally, as we consider the impact of the previously announced accelerated share repurchase program and our expected capital deployment for the remainder of the year, we now project our 2017 weighted average share count to be in the range of 334 million to 335 million shares
In closing, we are encouraged by the strength of our first quarter results and our improved 2017 outlook, particularly at this early stage in the year
Additionally, we remain confident in Aetna's long-term growth prospects and look forward to sharing more details at our upcoming Investor Update Meeting in May
I will now turn the call back over to Joe
Joe?
So a couple things on that, <UNK>
One I would say is we have some insights into the group MA pipeline, and we have some known sales already that we think are going to be significant enough that we have to ramp up for in advance
As we talked about, we've thought about what are the kinds of things that we need to do to continue to enhance and accelerate our growth in Medicare
And so we always have sort of the concept of investment money gated, that when we look at our performance, we make a decision about how to deploy that money
And in this case, we've decided to accelerate some spending in the areas of Stars, for example, geographic expansion, advancing some things in Medicaid
Again – and so these are all designed to be investments that are either related to known growth or to drive future growth in 2018 and thereafter
Well, the – I think certainly, the disability business is one that has had some linkage historically as we thought about the two, right? There are some somewhat arcane benefits in terms of how we position the investment portfolio and things like that
But operationally, they do largely run as two free-standing units for the most part today
There is cross-sell between – especially on the large accounts
We have a number of accounts where we would have the medical and also the group insurance
So what I would say is that we're tracking towards having about roughly half the loss that we reported last year this year, and that's on a quarter of the membership that we had, but that's a good sort of proxy
And just to be clear for everybody else, that PDR sort of goes all in and out within the 2017 year because it's all related to the 2017 policy year
Yeah, as <UNK> mentioned, we'll provide 2018 guidance later this year as is our convention
The point of your question, A
, obviously, is understanding bid positioning is a pretty big element to try to understand the year, so we'll do that at the appropriate time
What I would say, though, is that we're pleased with the 2017 earnings trajectory that we're on at this stage, especially in light of the continued drag that we've had with the individual business
And as was discussed on the call and a few of the questions, we're continuing to invest, and some of that investment is pointed at growth for 2018, and some of that is longer term growth
<UNK>, the thing I'd say, macro, on small group is that towards the end of last year, it felt like this started to turn a little bit for us in the favorable direction after having had some challenges
And for the most part, I would say that continued in the first quarter
I continue to be encouraged by the direction that the small group business is headed
So that all looks good
And as <UNK> mentioned, large group continues to be a stable performer
We continue to position ourselves carefully on the large group risk side of the business
But, again, those segments were generally at or better than expected in the first quarter
Chris, I mean unfortunately, this is a bit of a boring story in that not a lot has changed sort of on the pressure points or the new ones
I would say overall, again, we had a very well-behaved, moderate cost trend quarter
Certainly looking at prior-period development, that didn't lead to any surprises as those periods have matured
So we're probably looking – continue to look at inpatient in the mid singles, physician in the mid singles, outpatient in the high singles, and pharmacy in the low double digits
And the pharmacy story really continues to be one that's all about specialty pharma
I think that comprises something on the order of 40 % now of the costs and a very low percentage of the scripts
And so when you really dig into it, as I've said before, it continues to be issue one, two, and three when you look at the medical cost trend drivers
Yes
So, <UNK>, this is one of the areas, when we talk about the areas of uncertainty that we have, understanding again the risk adjustment of this very different and changed population from what we had last year is one of those challenges, especially in the first quarter where we really don't have mature data
The short version of the story is we still are in a fairly – we estimate that we're going to be in a pay-in position
That will probably, in a relative sense, be a little bit less of a pay-in position than we were last year, just given what we've seen happen to our book
But again, there's still a lot of uncertainty and blind spots that we have in terms of we know what happened to some degree to our population but we don't know what has happened in the overall market
So the takeaway is that we still have a risk-adjuster pay-in position but a little bit – maybe a little bit improved off of last year based on what we've seen so far
So I want to just clarify, I don't think we guided for any PYD in our initial guidance
We certainly have talked about what the historical levels have been
So we had in the first quarter probably on the order of $0.30 to $0.35 of PYD
Again, if you look at past years, we've continued to get smaller amounts of PYD in the subsequent quarters going forward
So I certainly don't – that certainly wouldn't be a surprise if that happened and we got some more in the second quarter of the year, for example, as that's how most of the prior years have played out
On the headwind piece, that originally was going to be about a $0.10 benefit and, as you all recall, it's just really an anomaly of how the accounting works for that recovery
Obviously as the year goes on, some of that's built into pricing already
It could decline slightly
But I think it's best to think about that as about a $0.10 item on that
We're probably over, <UNK>, about 100,000 AFA
alternate funding small group members
I don't have the revenue in front of me, but we can certainly follow up
Well, it's huge because we just launched it last year, right, so there's no denominator there
So a lot of that growth happened in the back of last year and in the first quarter of this year, especially
