FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
or
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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)
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Pennsylvania |
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23-2229683 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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151 Farmington Avenue, Hartford, CT |
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06156 |
(Address of principal executive offices) |
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(Zip Code) |
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Registrant’s telephone number, including area code |
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(860) 273-0123 |
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Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class |
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Name of each exchange on which registered |
Common Shares, $.01 par value |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities
Act. þ
Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act.
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Yes þ No
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 o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Act. (Check one):
Large
accelerated filer
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Accelerated filer o
Non-accelerated filer o
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
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Yes þ No
The aggregate market value of the outstanding common equity of the registrant as of the last
business day of the registrant’s most recently completed second fiscal quarter (June 30, 2005) was
$24.0 billion.
There were 567.1 million shares of voting common stock with a par value of $.01 outstanding at
January 31, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
The 2005 Annual Report, Financial Report to Shareholders (the “Annual Report”) is incorporated by
reference in Parts I, II and IV to the extent described therein. The definitive proxy statement
related to the registrant’s 2006 Annual Meeting of Shareholders, to be filed on or about March 21,
2006 (the “Proxy Statement”), is incorporated by reference in Parts III and IV to the extent
described therein.
Part I
Item 1. Business
Organization of Business
Aetna Inc.
(a Pennsylvania corporation) and its subsidiaries (collectively, the
“Company”) are one
of the nation’s leading diversified health care benefits companies, based on membership as of
December 31, 2005. Aetna Inc. was incorporated in Pennsylvania in 1982 under the name of United
States Health Care Systems, Inc.
Operating Segments
At December 31, 2005, the Company’s operations included three business segments: Health Care,
Group Insurance and Large Case Pensions. The principal products included in these segments are
as follows:
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Health Care consists of medical, pharmacy benefits
management, dental and vision plans offered on both a Risk basis
(where the Company assumes all or a majority of the risk for medical
and dental care costs) and an employer-funded basis (where the plan
sponsor assumes all or a majority of the risk for medical and dental
costs). Medical plans include point-of-service (“POS”),
health maintenance organization (“HMO”), preferred provider
organization (“PPO”) and indemnity benefit
(“Indemnity”) products. Health plans also include health
savings accounts (“HSAs”) and Aetna
HealthFund®,
consumer-directed health plans that combine traditional POS, PPO
and/or dental coverage, subject to a deductible, with an accumulating
benefit account. Health Care also offers network access products in
select markets and other products, including medical management
services, behavioral health and stop loss insurance. The
Company also provides access to networks of independent dental and vision participating
providers through its Vital Savings by Aetna SM discount program. |
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Group Insurance products include life, disability and long-term care insurance. |
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Large Case Pensions manages a variety of retirement products (including pension and
annuity products) primarily for tax qualified pension plans. |
The Company derives its revenues primarily from premiums earned on risk-based products, fees from
administrative services contracts, investments and other income. Revenue and profit information
by business segment is presented in Management’s Discussion and Analysis of Financial Condition
and Results of Operations (“MD&A”) and is set forth in Note 19 of Notes to Consolidated Financial
Statements, which are incorporated herein by reference to the Annual Report.
Company Strategy
The Company’s strategy is to establish a leadership position in the health care benefits industry
through consumerism, innovation, information and strategic acquisitions.
Evolution of the Health Insurance and Related Benefits Industry and the Company’s Businesses
The health insurance and related benefits industry continues to experience significant change.
Employers, consumers and the government have increased focus on health care costs, which continue
to drive changes in the structure of health insurance and related benefits products and services.
Product features continue to evolve that are directed at containing rising health care costs, and,
for employer-based health coverage, shifting costs among employers and covered employee members.
These economic factors and greater consumer awareness are also leading to increased popularity of
products that offer greater flexibility in design features such as deductibles and co-payments,
more consumer choice of health care providers and quality-based physician networks. The industry
is also subject to other forces including legislative and regulatory reforms, advances in medical
technology, or industry consolidation that can affect the competitiveness of product and service
offerings, the range of industry competitors and basis of competition.
Page 1
The Company believes that these factors will exist for some time, supporting a continuing evolution
in the industry. The Company places significant emphasis on maintaining and developing its product
and service offerings to serve existing and new customer markets and has done so through organic
and inorganic growth. In recent periods this focus has led to the introduction of new products,
such as the Company’s consumer-directed Aetna HealthFund®, HSA plans and recently
introduced Medicare Part D prescription drug plans, changes to deductibles, co-payments or other
features of its traditional health plans, and AexcelSM, the Company’s quality-based
specialist physician network. As the Company enhances its product capabilities and geographic
presence, it continually evaluates acquisitions and other
transactions that present key growth
opportunities. In an effort to expand and diversify its products and
capabilities, the Company engaged in the
following transactions during 2005, and believes that it will continue to execute business
development transactions:
Aetna
Behavioral Health – In December 2005, the Company
purchased the assets and operations of Magellan
Health Services, Inc. (“Magellan”) previously used to provide behavioral health care services
to the Company’s members. The transaction is a result
of an agreement the Company negotiated with Magellan in March 2003. Effective January 1,
2006, the Company launched a full-service behavioral health business.
Aetna Specialty Pharmacy, LLC (“ASP”) – In December 2005, the Company purchased the remaining
interest in ASP, a joint venture the Company launched with Priority Health Care Corporation
(“PHCC”) in 2004, to better serve Aetna members with conditions that require specialty
pharmaceuticals. The Company had owned 40% of the joint venture, with an option to purchase
the remaining interest, which accelerated upon the change in control of PHCC in October 2005.
This joint venture compliments the Company’s mail-order pharmacy, Aetna Rx Home
Delivery®, which was launched in 2003 and has operations in Missouri and Florida.
HMS
Healthcare, Inc. (“HMS”) – In July 2005, the Company acquired HMS, a privately held
regional health care network with operations primarily in Michigan and Colorado.
Active Health Management, Inc. (“Active Health”) – In May 2005, the Company acquired Active
Health, a privately held health management and health care data analytics company.
Strategic Resource Company (“SRC”) – In January 2005, the Company acquired SRC, a privately
held administrator of group limited benefit products for part-time and hourly workers. The
Company acquired 100% of the stock of SRC and reinsured the insurance contracts administered
by SRC.
Additionally,
on February 27, 2006, the Company announced its agreement with
Broadspire Services, Inc. and Broadspire Management Services, Inc. to
acquire its
disability and leave management businesses, which operates
as a third party administrator offering absence management services,
including short-term and long-term disability administration and
leave management to employers. The Company expects to close
this transaction during the second quarter of 2006.
Description of the Business
Health Care
Products and Services
Health Care products consist of medical, dental and pharmacy benefits management plans offered on
both a risk basis (where the Company assumes all or a majority of the financial risk for health
care costs) (“Risk”) and an employer-funded basis (where the employer or other plan sponsor under
an administrative services contract (“ASC”) assumes all or a majority of this risk). Medical
plans include HMO, POS, PPO and Indemnity products. Medical plans also include 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 or member in the case of HSAs). The Company’s principal commercial
health products (excluding Medicare and Medicaid products) are referred to as “Commercial” and,
are described in the following paragraphs.
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HMO Plans
HMO plans offer comprehensive benefits generally through contracts with participating
network physicians, hospitals and other providers. When an individual enrolls in one of
the Company’s HMOs, he or she may select a primary care physician (“PCP”) from among the
physicians participating in our network. PCPs generally are family practitioners,
internists, general practitioners or pediatricians who provide necessary preventive and
primary medical and dental care, and are generally responsible for coordinating other
necessary health care, including making referrals to participating network specialists.
The Company also offers open access HMO plans in certain markets that provides for the
full range of benefits available to HMO members without the requirements of PCP selection
or PCP referrals. The Company offers HMO plans with differing benefit designs and varying
levels of co-payments that result in different levels of premium rates, including to
federal government employee groups under the Federal Employees Health Benefits Program.
Indemnity Plans
Indemnity plans offer the member the ability to select any health care provider for
covered services. Some care management features may be included in these plans, such as
inpatient precertification, disease management programs and benefits for preventive
services. Coverage typically is subject to deductibles and coinsurance. In these plans,
as with the Company’s other health plans, member cost sharing for covered services
generally is limited by out-of-pocket maximums.
POS Plans
POS plans blend the characteristics of HMO and Indemnity plans. Members can have
comprehensive HMO-style benefits for services received from participating network
providers with lower co-payments, but also have coverage, generally at higher co-payment
or co-insurance levels, for services received outside the network. The Company also
offers an open access POS plan in certain markets that provides in-network benefits
without PCP selection or referral.
PPO Plans
PPO plans offer coverage for services received from any health care provider, with
benefits generally paid at a higher level when care is received from a participating
network provider. Coverage typically is subject to deductibles and co-payments or
coinsurance. Group limited benefit products for part-time and hourly workers utilize PPO
plans.
Consumer-Directed Plans
The Company also offers several products that are designed to increase the direct
involvement of consumers in the responsibility for accumulation and spending of health
benefit funds. Aetna HealthFund® and HSA plans are consumer-directed plans that
combine a traditional HMO, POS or PPO coverage, subject to a deductible, with an
accumulating benefit account allowing members greater flexibility in utilizing a portion
of their health benefit dollars.
Other Products
Through the use of its patented Care Engine® system, the Company’s Active
Health Management business provides evidence-based medical management and data analytics products and
services to a broad range of customers, including health plans, employers and others.
The
Company also maintains a regional health care network with
operations in Michigan, Colorado and other states. The Company provides access to this
network to a broad range of customers, including health plans and employers, for a fee.
In connection with the administration of ASC plans, the Company offers full-risk stop loss
coverage for certain employers. This coverage transfers to the Company the costs
associated with large individual claims and/or aggregate loss experience within the ASC
plan above a pre-set annual threshold.
The Vital Savings by Aetna SM discount program provides members access
to networks of independent dental, pharmacy, long term care and vision participating
providers who offer services at a discounted fee. Vital Savings by
Aetna SM is not an insurance product.
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In
addition to Commercial health products, in select markets the Company
also offers HMO and PPO-based
coverage for Medicare beneficiaries, participates in a subsidized children’s health insurance
program (“CHIP”) and has a Medicaid and a CHIP ASC arrangement. These products include the
following:
Medicare
Through annual contracts with the Centers for Medicare and Medicaid Services (“CMS”), the
Company offers HMO and PPO plans for Medicare-eligible individuals in certain geographic
areas through the Medicare Advantage (formerly Medicare+Choice) program. Members
typically receive enhanced benefits over standard Medicare fee-for-service coverage,
including reduced cost-sharing preventative care, vision and other non-Medicare services.
Given recent changes in Medicare resulting from the Medicare Prescription Drug Improvement
and Modernization Act of 2003 (the “Medicare Modernization Act”), the Company expanded its
Medicare Advantage program in select markets in 2005 and now offers it in 165 counties in
13 states and Washington D.C. Medicare Advantage membership totaled .1 million as of
December 31, 2005, 2004 and 2003.
The Company was selected by CMS to be a national provider of the Medicare Part D
Prescription Drug program (“PDP”) in all 50 states to both individuals and employer groups
starting in 2006. All Medicare eligible individuals will be eligible to participate in
this voluntary prescription drug plan. Members typically receive coverage for certain
prescription drugs, usually subject to a deductible, co-insurance and/or co-payment.
Medicaid and CHIP
The Company participates on a Risk basis in a CHIP contract in Pennsylvania, and provides
administrative services in connection with a hospital-based Medicaid and CHIP contract in
Texas.
The Company offers a variety of other health care coverage products either as supplements to
health products or as stand-alone products. Such products, which may be offered on a Risk or an
ASC basis, include indemnity and managed dental plans, pharmacy benefit management, vision and
behavioral health programs. The Company is one of the nation’s largest providers of dental
coverage, based on membership at December 31, 2005. As of December 31, 2005, dental membership
totaled 13.1 million compared to 12.0 million as of December 31, 2004 and 10.9 million as of
December 31, 2003.
Provider Networks
The Company contracts with physicians, hospitals and other health care providers for services
provided to its health plan members and the members of its customers. The participating providers in the Company’s networks are independent
contractors and are neither employees nor agents of the Company, except for providers in the
Company’s mail-order and specialty pharmacy facilities.
The Company uses a variety of techniques designed to help improve optimal utilization of medical
resources and maintain affordability of quality coverage. In addition to contracts with health
care providers for negotiated rates of reimbursement, these techniques include the development
and implementation of standards for the appropriate utilization of health care resources and
working with health care providers to review data in order to help them improve consistency and
quality. The Company also offers, directly or in cooperation with third parties, a variety of
disease management programs related to specific conditions such as asthma, diabetes, congestive
heart failure and lower back pain.
At December 31, 2005, the Company had expansive nationwide provider networks of more than 721,000
health care providers, including over 431,200 primary care and specialist physicians and over
4,300 hospitals.
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Primary Care Physicians
The Company compensates PCPs on both a fee-for-service and capitated basis, with
capitation generally limited to HMO products. In a fee-for-service arrangement, network
physicians are paid for health care services provided to the member based upon a fee
schedule. Under a capitation arrangement, physicians receive a monthly fixed fee for each
member, regardless of the medical services provided to the member. In recent years, the
Company has eliminated or reduced the use of capitation arrangements in many areas. The
percentage of health care costs related to capitation arrangements was 7.9% for the year
ended December 31, 2005 compared to 9.1% and 10.9% for the years ended December 31, 2004
and 2003, respectively.
Specialist Physicians
Specialist physicians participating in the Company’s networks are generally reimbursed at
contracted rates per visit or procedure. In 2004, the Company introduced
AexcelSM, an innovative quality-based specialist network option within the
customer’s health plan, in certain geographic areas.
Hospitals
The Company typically enters into contracts with hospitals that provide for per day and/or
per case rates, often with fixed rates for ambulatory, surgery and emergency room
services. The Company also has hospital contracts that provide for reimbursement based on
a percentage of the charges billed by the hospital.
The Company’s medical plans generally require notification of elective hospital
admissions, and the Company monitors the length of hospital stays. Participating
physicians generally admit their HMO and POS patients to participating hospitals using
referral procedures that direct the hospital to contact the Company’s patient management
unit, which confirms the patient’s membership status while obtaining pertinent data. This
unit also assists members and providers with related activities, including the subsequent
transition to the home environment and home care, if necessary. Case management
assistance for complex or “catastrophic” cases is provided by a special case unit.
Other Providers
The Company’s plans generally employ fee-for-service payment arrangements for most
freestanding laboratory services.
Quality Assessment
The Company’s quality assessment programs for directly contracted providers begin with the
initial review of health care practitioners. Practitioners’ licenses and education are verified,
and their work history is collected by the Company or in some cases by the practitioner’s
affiliated group or organization. A committee of participating practitioners in each region
reviews this information before the practitioner can participate in the network. Participating
practitioners also periodically undergo a recredentialing process. Participating hospitals are
required to have accreditation by CMS and the Joint Commission on Accreditation of Healthcare
Organizations or undergo a detailed site assessment by the Company’s quality management staff.
Recredentialing of practitioners may include an analysis of member grievances filed with the
Company, interviews, member surveys and analysis of drug prescription and other utilization
patterns. Committees composed of a peer group of participating practitioners review
participating practitioners being considered for recredentialing.
The Company also offers quality and outcome measurement programs, quality improvement programs
and health care data analysis systems to providers and purchasers of health care services.
The Company seeks accreditation for most of its HMO plans from the National Committee for Quality
Assurance (the “NCQA”), a national organization established to review the quality and medical
management systems of HMOs and certain other health care plans. NCQA accreditation is a
nationally recognized standard. As of December 31, 2005, approximately 99% of the Company’s
HMO members participated in HMOs that had
received accreditation by the NCQA.
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The Company seeks accreditation for its PPO-based and other products from the American
Accreditation Health Care Commission (also known as “URAC”), a national organization founded in
1990 to establish standards for the health care industry. Purchasers and consumers look to URAC’s
accreditation as an indication that a health care organization has the necessary structures and
processes to promote high quality care and preserve patient rights. In addition, regulators in
over half of the states recognize URAC’s accreditation standards in the regulatory process. Aetna
Life Insurance Company (“ALIC”), a wholly-owned subsidiary of Aetna, has received URAC
accreditation extending through May 1, 2006.
Principal Markets and Sales
The Company’s medical membership is dispersed throughout the United States. The Company offers a
wide array of benefit plans, many of which are available in all 50 states. Depending on the
product, the Company markets to a range of customers from individuals and small employer groups
to large, multi-site national accounts.
The following table presents total medical membership by region and funding arrangement at
December 31, 2005, 2004 and 2003:
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2005 |
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2004 |
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2003 |
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Risk |
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ASC |
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Total |
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Risk |
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ASC |
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Total |
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Risk |
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ASC |
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Total |
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Northeast |
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1,205 |
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1,365 |
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2,570 |
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1,143 |
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1,298 |
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2,441 |
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1,054 |
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1,221 |
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2,275 |
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Mid-Atlantic |
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1,122 |
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1,505 |
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2,627 |
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1,043 |
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1,470 |
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2,513 |
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927 |
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1,457 |
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2,384 |
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Southeast |
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894 |
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1,565 |
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2,459 |
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809 |
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1,433 |
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2,242 |
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779 |
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1,415 |
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2,194 |
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North Central |
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542 |
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2,173 |
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2,715 |
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471 |
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2,079 |
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2,550 |
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413 |
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2,009 |
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2,422 |
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Southwest |
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596 |
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1,554 |
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2,150 |
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557 |
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1,376 |
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1,933 |
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529 |
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1,294 |
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1,823 |
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West |
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748 |
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1,312 |
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2,060 |
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673 |
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1,211 |
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1,884 |
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693 |
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1,144 |
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1,837 |
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Other |
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109 |
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65 |
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174 |
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85 |
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8 |
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93 |
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63 |
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4 |
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67 |
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Total medical
membership |
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5,216 |
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9,539 |
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14,755 |
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4,781 |
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8,875 |
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13,656 |
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4,458 |
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8,544 |
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13,002 |
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For membership composition of Health Care’s products by funding arrangement, refer to MD&A —
Health Care — Membership in the Annual Report, which is incorporated herein by reference.
Both Risk and ASC products and services are marketed primarily to employers (also referred to in
this report as “plan sponsors”) for the benefit of employees and their dependents. Frequently,
employers offer employees a choice among coverage options, from which the employee makes his or
her selection during a designated annual open enrollment period. Employers pay all of the
monthly premiums to the Company and, through payroll deductions, obtain reimbursement from
employees for a percentage, as determined by the employer, of such monthly premium.
Within Risk products, Medicare coverage is sold on an individual basis as well as through
employer groups to their retirees. Medicaid and subsidized CHIP arrangements are marketed on an
individual basis.
Health Care products are sold through the Company’s sales personnel, as well as independent
brokers and consultants. Sales
representatives also sell to employers on a direct basis. For large plan sponsors, independent
consultants and brokers are frequently involved in employer health plan selection decisions and
sales. Marketing and sales efforts are promoted by an advertising program which includes
television, radio, billboards and print media, supported by market research and direct marketing
efforts.
Health Pricing
For Commercial Risk plans, employer group contracts are generally established in advance of the
policy period, typically for a duration of one year. In determining the premium rates to be
charged to the employer group, prospective and retrospective rating methodologies may be used.
Premium rates generally give consideration to the individual plan sponsor’s historical and
anticipated claim experience. Some states may prohibit the use of one or more of these rating
methods for some customers, such as small employer groups, or all customers.
Page 6
Under prospective rating, a fixed premium rate is determined at the beginning of the policy
period. Unanticipated increases in medical costs cannot be recovered in the current policy year;
however, prior experience for a product in the aggregate may be considered, among other factors,
in determining premium rates for future periods. Where required by law, the Company establishes
premium rates prior to contract inception without regard to actual utilization of services
incurred by individual members, using approved rating methods. State laws, in some of the states
in which the Company operates plans, require the filing with and approval by the state of plan
premium rates (some states only require this for premiums to small groups). In addition to
reviewing anticipated medical costs, some states also review anticipated administrative costs as
part of the approval process. Future results of the Company could be adversely affected if the
premium rates requested by the Company are not approved or are adjusted downward by state
regulators.
Under retrospective rating, a premium rate is determined at the beginning of the policy period.
After the policy period has ended, the actual experience is reviewed. If the experience is
favorable (i.e., actual claim costs and other expenses are less than expected) a refund may be
credited to the plan sponsor. If the experience is unfavorable, the resulting deficit may, in
certain instances, be recovered through contractual provisions; otherwise the deficit is
considered in setting future premium levels. If a plan sponsor elects to terminate coverage,
these deficits generally cannot be recovered. Retrospective rating
may be used for commercial plans that cover more than 300 lives.
The Company has Medicare Advantage contracts with CMS to provide HMO and PPO coverage to Medicare
beneficiaries in certain geographic areas. Under these annual contracts, CMS pays the Company a
fixed capitation payment based on membership and adjusted for demographic and health risk
factors. Inflation, changes in utilization patterns and average per capita fee-for-service
Medicare costs are also considered in the calculation of the fixed
capitation payment by CMS. Amounts payable under
Medicare Advantage arrangements are subject to annual revision by CMS, and the Company elects to
participate in each Medicare service area or region on an annual basis. In addition to payments
received from CMS, most of the Medicare Advantage products offered by the Company require a
supplemental premium to be paid by the member or sponsoring employer. Compared to commercial
business, Medicare contracts generate higher per member per month revenues and medical expenses.
In addition, beginning in 2006, the Company has contracted with CMS to provide Medicare
PDP coverage to Medicare beneficiaries. Under these annual contracts, CMS pays the Company a
portion of the premium, reinsures a portion of or pays a capitated fee to the Company for
catastrophic drug costs, pays a portion of the health care costs for low-income Medicare
beneficiaries and provides a risk sharing arrangement to limit the Company’s exposure to unexpected
expenses. The portion of the premium CMS pays is based on the average of bids submitted by the
private sector plans for particular regions. Catastrophic drug costs are reinsured when the
Medicare beneficiary reaches an out-of-pocket drug cost threshold. The Company offers plans with
enhanced benefits that may pay a portion of the beneficiary’s drug costs in excess of the actuarial
equivalent of the standard prescription drug plan. For these
products, CMS pays a capitated amount to the Company in lieu of
reinsurance for catastrophic drug costs. Low income beneficiaries, based on their income and asset levels, have
some or all of their costs associated with premiums and drug costs paid by CMS. The risk sharing
arrangement provides for payments either to or from CMS depending on the relationship between
allowable drug costs incurred by the Company and established targets. Amounts payable under the
prescription drug plan are subject to annual revision by CMS, and the Company elects to participate
on an annual basis.
The
Company also has HMO and consumer-directed contracts to serve a variety of federal government employee groups under
the Federal Employees Health Benefit Program. Premium rates are subject to federal government
review and audit, which can result in retroactive and prospective premium adjustments.
Contracts with plan sponsors to provide administrative services for employer-funded plans are
generally for a period of one year. Some of the Company’s contracts include guarantees with
respect to certain functions such as customer service response time, claim processing accuracy
and claim processing turnaround time as well as certain guarantees that claim expenses to be
incurred by plan sponsors will fall within a specified range. With any
of these guarantees, the Company is financially at risk if the conditions of the arrangements are
not met, although the maximum at risk is typically 10% — 30% of fees for the customer involved.
Page 7
Competition
Competition
in the health care industry is highly competitive, primarily due to a large number of
competitors, competitor marketing and pricing, and a proliferation of competing products,
including new products that are continually being introduced into the market. New entrants into
the marketplace as well as significant consolidation within the industry have contributed to the competitive environment.
The Company believes that the significant factors that distinguish competing health plans are
perceived overall quality (including accreditation status), quality of service, comprehensiveness
of coverage, cost (including both premium and member out-of-pocket costs), product design,
financial stability, the geographic scope of provider networks, and the providers available in
such networks. The Company believes that it is competitive on each of these factors. The
ability to increase the number of persons covered by the Company’s plans or to increase revenues
is affected by our ability to differentiate ourselves from our competitors on these factors. In
addition, the ability to increase the number of persons enrolled in Risk products is affected by
the desire and ability of employers to self fund their health coverage. Competition may also
affect the availability of services from health care providers, including primary care
physicians, specialists and hospitals.
Within Risk products, the Company competes with local and regional managed care plans, in
addition to managed care plans sponsored by large health insurance companies and Blue Cross/Blue
Shield plans. Additional competitors include other types of medical and dental provider
organizations, various specialty service providers, integrated health care delivery
organizations, and in certain plans, programs sponsored by the federal or state governments.
With
regard to ASC plans, the Company competes primarily with other large commercial health
benefit companies, Blue Cross/Blue Shield plans and third party administrators.
Factors Affecting Forward-Looking Information
Information regarding certain important factors that may materially affect Health Care’s business
is incorporated herein by reference to the MD&A — Forward-Looking Information/Risk Factors and
the MD&A – Overview in the Annual Report.
Group Insurance
Principal Products
Group Insurance products consist primarily of the following:
| |
• |
|
Life Insurance Products consist principally of renewable term life insurance coverage,
the amounts of which may be fixed or linked to individual employee
wage levels. Basic, supplemental, spouse and dependent term life coverage, and group universal life and
accidental death and dismemberment coverage are also available. Life products are offered
on a Risk basis. As of December 31, 2005, Life product membership totaled 10.8 million
compared to 10.9 million as of December 31, 2004 and 10.0 million as of December 31, 2003. |
| |
| |
• |
|
Disability Insurance Products provide employee income replacement benefits for both
short-term and long-term disability. The Company also offers disability products with
additional case management features. Similar to Health Care products, disability benefits
are offered on both a Risk and employer-funded basis. As of December 31, 2005, disability
membership totaled 2.6 million compared to 2.3 million as of December 31, 2004 and 2.1
million as of December 31, 2003. |
| |
| |
• |
|
Long-Term Care Insurance Products provide benefits to cover the cost of care in private
home settings, adult day care, assisted living or nursing facilities. Long term care
benefits are offered primarily on a Risk basis. The product is available on both a service
reimbursement and disability basis. The Company does not actively market the disability
product although the product and rate filings remain in full effect. Long-term care
membership totaled .2 million as of December 31, 2005, 2004 and 2003. |
Group Insurance members may utilize more than one Company product, and multi-product cases have
been counted in membership totals for each product description above.
Page 8
Principal Markets and Sales
Products offered by Group Insurance are available in 49 states (Group Insurance products are not
offered in New Mexico) as well as the District of Columbia, Guam, Puerto Rico, the United States
Virgin Islands and Canada. Depending on the product, the Company markets to a range of customers
from small employer groups to large, multi-site and/or multi-state employer programs.
Group Insurance products and services are marketed primarily to employers for the benefit of
employees and their dependents. Frequently, employers offer employees a choice of benefits, from
which the employee makes his or her selection during a designated annual open enrollment period.
Typically, employers pay all of the monthly premiums to the Company and, through payroll
deductions, obtain reimbursement from employees for a percentage, as determined by the employer, of
the monthly premium. Some products are sold on a fully employee-paid basis, and some billing is
done on an individual basis.
Group Insurance products are sold through the Company’s sales personnel, as well as independent
brokers and consultants who assist in the production and servicing of business. Sales
representatives also sell to employers on a direct basis. For large plan sponsors, independent
consultants and brokers are frequently involved in employer plan selection decisions and sales.
Marketing and sales efforts are promoted by an advertising program that may include television,
radio, billboards and print media, supported by market research and direct marketing efforts.
Pricing
For Risk Group Insurance plans, employer group contracts are generally established in advance of
the policy period. In determining the premium rates to be charged to the employer group,
prospective and retrospective rating methodologies are used.
Under prospective rating, a fixed premium rate is determined at the beginning of the policy
period. Unanticipated increases in mortality or morbidity costs cannot be recovered in the current
policy period; however, prior experience for the specific customer and/or the product in aggregate
is considered, among other factors, in determining premium rates for future policy periods.
Under retrospective rating, a premium rate is determined at the beginning of a policy period.
After the policy period has ended, the actual experience is reviewed. If the experience is
favorable (i.e., actual claim costs and other expenses are less than expected) a refund may be
credited to the plan sponsor. If the experience is unfavorable, the resulting deficit is
considered in setting future premium levels; otherwise, in certain circumstances, the deficit may
be recovered through contractual provisions. Such deficits may be used as offsets against refund
credits that develop for future policy periods. If a customer elects to terminate coverage,
deficits may not be recovered. Retrospective rating is most often used for insured employer funded
plans that cover more than 3,000 lives and $500,000 in annual premiums.
Competition
For the group insurance industry, the Company believes that the most significant factors which
distinguish competing companies are price, quality of service, comprehensiveness of coverage, and
product array and design. Specialty carriers have increased market penetration in the life and
disability business. The group life market remains highly competitive.
Reinsurance
The Company has several reinsurance agreements with nonaffiliated insurers related to Group
Insurance products. For long-term disability products, there are excess of loss arrangements that
provide protection against large claims. Additional reinsurance arrangements include quota share
treaties on several large cases that are established on a case by case basis.
Page 9
Group Life Insurance In Force and Other Statistical Data
The following table summarizes changes in group life insurance in force before deductions for
reinsurance ceded to other companies for the years indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in Millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
| |
In force, end of year |
|
$ |
559,979 |
|
|
$ |
513,452 |
|
|
$ |
473,483 |
|
| |
Terminations (lapses and all other) |
|
$ |
64,768 |
|
|
$ |
50,602 |
|
|
$ |
51,983 |
|
| |
Number of policies and contracts in force, end of year: |
|
|
|
|
|
|
|
|
|
|
|
|
Group Life Contracts (1) |
|
|
18,292 |
|
|
|
14,243 |
|
|
|
11,791 |
|
Group Conversion Policies (2) |
|
|
22,277 |
|
|
|
23,160 |
|
|
|
24,448 |
|
| |
| |
|
(1) Due to the diversity of coverages and size of covered groups, statistics are not provided for average size of policies in force. |
| |
| |
|
(2) Reflects conversion privileges exercised by insureds under group life policies to replace those policies with individual life policies. |
Factors Affecting Forward-Looking Information
Information regarding certain important factors that may materially affect Group Insurance’s
business is incorporated herein by reference to the MD&A — Forward-Looking Information/Risk
Factors and the MD&A – Overview in the Annual Report.
Large Case Pensions
Principal Products
Large Case Pensions manages a variety of retirement products (including pension and annuity
products) primarily for Internal Revenue Code Section 401 qualified pension plans. Contracts
provide non-guaranteed, experience-rated and guaranteed investment options through general and
separate account products. Large Case Pensions’ products that use separate accounts provide
contract holders with a vehicle for investments under which the contract holders assume the
investment risk. Large Case Pensions earns a management fee on these separate accounts.
In 1993, the Company discontinued its fully guaranteed Large Case Pensions products. Information
regarding these products is incorporated herein by reference to the MD&A — Large Case Pensions -
Discontinued Products in the Annual Report. Additionally, the Company does not actively market its
other Large Case Pensions products, but continues to manage the run-off of existing business.
Factors Affecting Forward-Looking Information
Information regarding certain important factors that may materially affect Large Case Pensions’
business is incorporated herein by reference to the MD&A — Overview in the Annual Report.
Other Matters
Access to Reports
Aetna’s reports to the U.S. Securities and Exchange Commission (the “SEC”), including its Annual
Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those
reports, if any, are available without charge on the Company’s website at http://www.aetna.com as
soon as practicable after they are electronically filed or furnished to the SEC. Copies are also
available, without charge, from Aetna’s Investor Relations Department, 151 Farmington Avenue,
Hartford, CT 06156.
Regulation
Information regarding significant regulations affecting the Company is incorporated herein by
reference to the MD&A — Regulatory Environment and Forward-Looking Information/Risk Factors, in
the Annual Report.
Trademarks
The trademarks Aetna® and Care Engine®, together with the corresponding
Aetna design logo, are owned by the Company. The Company considers these trademarks and its
other trademarks and trade names important in the operation of its business. However, the
business of the Company, including that of each of its individual segments, is not dependent on
any individual trademark or trade name.
Page 10
Ratings
Information regarding the Company’s ratings is incorporated herein by reference to the ratings
table in the MD&A — Liquidity and Capital Resources – Ratings in the Annual Report.
Miscellaneous
The
Company had approximately 28,200 domestic employees at December 31, 2005.
The federal government is a significant customer of the Health Care segment and the Company, with
premiums and fees accounting for approximately 10.1% of the Health Care segment’s revenue in
2005. Contracts with CMS for coverage of Medicare-eligible individuals accounted for 51.0% of
these premiums and fees, with the balance from federal employee related benefit programs. No
individual customer, in any of the Company’s segments, accounted for 10% or more of the Company’s
consolidated revenues in 2005. The Company’s segments are not dependent upon a single customer
or a few customers, the loss of which would have a significant effect on the earnings of a
segment. The loss of business from any one, or a few, independent brokers or agents would not
have a material adverse effect on the earnings of the Company or any of its segments. Refer to
Note 19 of Notes to Consolidated Financial Statements, which is incorporated herein by reference
to the Annual Report, regarding segment information.
The Company carries excess professional liability insurance.
Item 1A. Risk Factors
The information contained in the MD&A – Forward-Looking Information/Risk Factors in the Annual
Report is incorporated herein by reference.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The principal office of the Company is a building complex located at 151 Farmington Avenue,
Hartford, Connecticut that is approximately 1.2 million square feet in size. The principal
office is used by all the Company’s business segments. The Company also owns or leases other
space in the greater Hartford area; Blue Bell, Pennsylvania; and various field locations
throughout the country. Such properties are primarily used by the Company’s Health Care segment.
The Company believes its properties are adequate and suitable for its business as presently
conducted.
The foregoing does not include numerous investment properties held by the Company in its general
and separate accounts.
Item 3. Legal Proceedings
Managed Care Class Action Litigation
From 1999 through early 2003, the Company was involved in purported class action lawsuits as part
of a wave of similar actions targeting the health care payor industry and, in particular, the
conduct of business by managed care companies. These cases, brought on behalf of health care
providers (the “Provider Cases”), alleged generally that the Company and other defendant managed
care organizations engaged in coercive behavior or a variety of improper business practices in
dealing with health care providers and conspired with one another regarding this purported
wrongful conduct.
Page 11
Effective May 21, 2003, the Company and representatives of over 900,000 physicians, state and
other medical societies entered into an agreement (the “Physician Settlement Agreement”) settling
the lead physician Provider Case, which was pending in the United States District Court for the
Southern District of Florida (the “Florida Federal Court”). The Company believes that the
Physician Settlement Agreement, which has received final court approval, resolved all then pending
Provider Cases filed on behalf of physicians that did not opt out of the settlement. During the
second quarter of 2003, the Company recorded a charge of $75 million ($115 million pretax)
(included in other operating expenses) in connection with the Physician Settlement Agreement, net
of an estimated insurance recoverable of $72 million pretax. The Company believes its insurance
policies with its third party insurance carriers apply to this matter and is vigorously pursuing recovery
from those carriers. The Company has not received any insurance recoveries as of December 31,
2005. The Company continues to work with plaintiffs’ representatives in implementing the
Physician Settlement Agreement and the issues that may arise thereunder.
Several Provider Cases filed in 2003 on behalf of purported classes of chiropractors and/or all
non-physician health care providers also make factual and legal allegations similar to those
contained in the other Provider Cases, including allegations of violations of the Racketeer
Influenced and Corrupt Organizations Act. These Provider Cases seek various forms of relief,
including unspecified damages, treble damages, punitive damages and injunctive relief. These
Provider Cases have been transferred to the Florida Federal Court for consolidated pretrial
proceedings. The Company intends to defend each of these cases vigorously.
Insurance Industry Brokerage Practices Matters
The Company has received subpoenas and other requests for information from the New York Attorney
General, the Connecticut Attorney General, other attorneys general and various insurance and other
regulators with respect to an industry wide investigation into certain insurance brokerage
practices, including broker compensation arrangements, bid quoting practices and potential
antitrust violations. The Company may receive additional subpoenas and requests for information
from these attorneys general and regulators. The Company is cooperating with these inquiries.
In connection with this industry wide review, the Company may receive additional subpoenas and
requests for information from other attorneys general and other regulators, and the Company could
be named in related litigation.
Other Litigation and Regulatory Proceedings
The Company is involved in numerous other lawsuits arising, for the most part, in the ordinary
course of its business operations, including employment litigation and claims of bad faith,
medical malpractice, non-compliance with state regulatory regimes, marketing misconduct, failure
to timely pay medical claims, investment activities, intellectual property and other litigation in
its Health Care and Group Insurance businesses. Some of these other lawsuits are or are purported
to be class actions. The Company intends to defend these matters vigorously.
In addition, the Company’s current and past business practices are subject to review by, and the
Company from time to time receives subpoenas and other requests for information from, various
state insurance and health care regulatory authorities and other state and federal authorities.
There also continues to be heightened review by regulatory authorities of the managed health care
industry’s business practices, including utilization management, delegated arrangements and claim
payment practices. As a leading national managed care organization, the Company regularly is the
subject of such reviews. These reviews may result, and have resulted, in changes to or
clarifications of the Company’s business practices, as well as fines, penalties or other
sanctions.
The Company is unable to predict at this time the ultimate outcome of the remaining Provider
Cases, the insurance industry brokerage practices investigations or other litigation and
regulatory proceedings, and it is reasonably possible that their outcome could be material to the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 12
EXECUTIVE OFFICERS OF AETNA INC.
The Chairman is elected by the Board of Directors (the “Board”) and all other executive officers
listed below are appointed by the Board at its Annual Meeting, and such persons hold office until
the next Annual Meeting of the Board or until their successors are elected or appointed. None of
these officers has a family relationship with any other executive officer or Director. In
addition, there exist no arrangements or understandings, other than those with Directors or
officers of the Company acting solely in their capacities as such, pursuant to which these
executive officers were appointed.
| |
|
|
|
|
|
|
| Name of Executive Officer |
|
Position
* |
|
Age * |
John W. Rowe, M.D.
|
|
Chairman
|
|
|
61 |
|
|
|
|
|
|
|
|
Ronald A. Williams
|
|
Chief Executive Officer and President
|
|
|
56 |
|
|
|
|
|
|
|
|
Mark T. Bertolini
|
|
Executive Vice President, Regional Businesses
|
|
|
49 |
|
|
|
|
|
|
|
|
James K. Foreman
|
|
Executive Vice President, National Businesses
|
|
|
47 |
|
|
|
|
|
|
|
|
Alan M. Bennett
|
|
Senior Vice President and Chief
Financial Officer
|
|
|
55 |
|
|
|
|
|
|
|
|
Troyen A. Brennan, M.D.
|
|
Senior Vice President and Chief Medical Officer
|
|
|
51 |
|
|
|
|
|
|
|
|
Craig R. Callen
|
|
Senior Vice President, Strategic
Planning and Business Development
|
|
|
50 |
|
|
|
|
|
|
|
|
William J. Casazza
|
|
Senior Vice President and General Counsel
|
|
|
50 |
|
|
|
|
|
|
|
|
Timothy A.
Holt
|
|
Senior Vice President, Chief Investment Officer
and Chief Enterprise Risk Officer
|
|
|
52 |
|
Executive Officers’ Business Experience During Past Five Years
John W. Rowe, M.D., became Chairman of the Company on April 1, 2001. He served as Chief Executive
Officer of the Company from September 15, 2000 to February 14, 2006 and served as President of the
Company from September 15, 2000 to May 27, 2002. Dr. Rowe plans to retire from the Company no
later than the end of 2006.
Ronald A. Williams became Chief Executive Officer of the Company on February 14, 2006, succeeding
Dr. Rowe, and has served as President since May 27, 2002. He served as Executive Vice President
and Chief of Health Operations from March 15, 2001 to May 27, 2002.
Mark T. Bertolini became Executive Vice President, Regional Businesses on February 1, 2006,
having served as Senior Vice President, Regional Businesses since September 2005. Prior to that,
he served as Senior Vice President, Specialty Group from April 2005 to September 2005 and as
Senior Vice President, Specialty Products from February 2003 to April 2005. Prior to joining the
Company, Mr. Bertolini served as Senior Vice President, Regional Segment and Middle Market Growth
of CIGNA Corporation (“CIGNA”) from November 2002 to February 2003 and as Senior Vice President,
National Sales and Delivery of CIGNA from October 2000 to November 2002.
Page 13
James K. Foreman became Executive Vice President, National Businesses on February 1, 2006, having
served as Senior Vice President, National Businesses since September 2005. Prior to that, he
served as Senior Vice President, National Accounts and Global Benefits from February 2005 to
September 2005. Prior to joining the Company, Mr. Foreman served as Managing Director, Global
Health and Welfare, Towers Perrin from August 2000 to February 2005, and managed Towers Perrin’s
Chicago consulting office from September 1997 to August 2000.
Alan M. Bennett became Senior Vice President and Chief Financial Officer of the Company on
September 28, 2001. He served as Vice President and Corporate Controller from December 2000 to
November 2001.
Troyen A. Brennan, M.D., became Senior Vice President and Chief Medical Officer of the Company on
February 21, 2006. Prior to joining the Company, Dr. Brennan served as President and Chief
Executive Officer of Brigham and Women’s Physician Organization, a position he assumed in January
2000, as Professor of Medicine, Harvard Medical School, since July 1995 and as Professor of Law
and Public Health, Harvard School of Public Health, since July 1992.
Craig R. Callen became Senior Vice President, Strategic Planning and Business Development of the
Company on April 28, 2004. Prior to joining the Company, Mr. Callen served as a Managing Director
of Credit Suisse First Boston and head of U.S. health care in its Investment Banking Group,
positions he assumed in November 2000.
William J. Casazza became Senior Vice President and General Counsel of the Company on September 6,
2005. He served as Senior Vice President and Deputy General Counsel from July 6, 2004 to September
6, 2005. Prior to that, he served as Vice President and Deputy General Counsel from December 2000
to July 6, 2004. Mr. Casazza also served as Corporate Secretary from October 2000 to January 27,
2006.
Timothy A. Holt became Senior Vice President, Chief Investment Officer and Chief Enterprise Risk
Officer of the Company on September 24, 2004. He served as Senior Vice President and Chief
Investment Officer from December 8, 2000 to September 24, 2004.
Part II
Item 5. Market Price for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Aetna Inc.’s common shares (“common stock”) are listed on the New York Stock Exchange. They
trade under the symbol AET. As of January 31, 2006, there were 11,777 record holders of Aetna
Inc.’s common stock.
On January 27, 2006, the Company’s Board of Directors (the “Board”) declared a two-for-one stock
split of the Company’s common stock which was effected in the form of a 100% common stock dividend
(the “2006 stock split”). All shareholders of record at the close of business on February 7, 2006
(the “2006 Shareholders of Record”) received one additional share of common stock for each share
held on that date. The additional shares of common stock were distributed to the 2006 Shareholders
of Record in the form of a stock dividend on February 17, 2006. All share and per share amounts in
this Form 10-K for periods prior to the 2006 stock split have been adjusted to reflect the 2006
stock split. In connection with the 2006 stock split, the Board approved an amendment to the
Company’s Articles of Incorporation. This amendment increased the number of authorized common
shares of the Company to 2.9 billion shares on February 17, 2006.
On February 9, 2005, the Board declared a two-for-one stock split of the Company’s common stock
which was effected in the form of a 100% common stock dividend (the “2005 stock split”). All
shareholders of record at the close of business on February 25, 2005 (the “2005 Shareholders of
Record”) received one additional share of common stock for each share held on that date. The
additional shares of common stock were distributed to the 2005 Shareholders of Record in the form
of a stock dividend on March 11, 2005. All share and per share amounts in this Form 10-K for
periods prior to the 2005 stock split have been adjusted to reflect the 2005 stock split. In
connection with the 2005 stock split, the Board approved an amendment to the Company’s Articles
of Incorporation. This amendment increased the number of authorized common shares of the Company
to 1.5 billion shares on March 11, 2005.
Page 14
On February 25, 2005 and September 29, 2005, the Board authorized (and the Company announced) two
share repurchase programs for the repurchase of up to $750 million of common stock each ($1.5
billion in aggregate).
For the three months ended December 31, 2005, the Company repurchased 9.2 million shares of
common stock at a cost of $431 million, completing the February 25, 2005 authorization and
utilizing a portion of the September 29, 2005 authorization. As of December 31, 2005, the
Company had authorization to repurchase up to $581 million of common stock remaining under the
September 29, 2005 authorization. On January 27, 2006, the Board authorized (and the Company
announced) an additional $750 million share repurchase program which will commence upon
completion of the September 29, 2005 authorization.
The following table provides information about the monthly share repurchases by the Company as
part of publicly announced programs for the three months ended December 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
| |
October 1, 2005 - October 31, 2005 |
|
|
.2 |
|
|
$ |
44.27 |
|
|
|
.2 |
|
|
$ |
1,001.6 |
|
November 1, 2005 - November 30, 2005 |
|
|
5.3 |
|
|
|
45.86 |
|
|
|
5.3 |
|
|
|
759.6 |
|
December 1, 2005 - December 31, 2005 |
|
|
3.7 |
|
|
|
48.07 |
|
|
|
3.7 |
|
|
|
580.9 |
|
| |
Total |
|
|
9.2 |
|
|
$ |
46.72 |
|
|
|
9.2 |
|
|
|
N/A |
|
| |
The Company declared, and subsequently paid, an annual cash dividend in the amount of $.02
per share of common stock in 2005 and $.01 per share of common stock in each of 2004 and 2003.
Refer to the MD&A – Liquidity and Capital Resources – Dividends in the Annual Report,
incorporated herein by reference, for additional information regarding dividend payments.
Information regarding restrictions on the Company’s present and future ability to pay dividends
is incorporated herein by reference to Note 16 of Notes to Consolidated Financial Statements and
the MD&A — Liquidity and Capital Resources in the Annual Report. Information regarding quarterly
common stock prices is incorporated herein by reference to the Quarterly Data (unaudited)
included in the Annual Report.
Item 6. Selected Financial Data
The information contained in Selected Financial Data in the Annual Report is incorporated
herein by reference.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information contained in the MD&A in the Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information contained in the MD&A — Investments in the Annual Report is incorporated herein
by reference.
Item 8. Financial Statements and Supplementary Data
The information contained in Consolidated Financial Statements, Notes to Consolidated Financial
Statements, Report of Independent Registered Public Accounting Firm and Quarterly Data
(unaudited) in the Annual Report are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Page 15
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, which are designed to ensure that
information required to be disclosed by the Company in the reports it files or submits 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 the Company’s management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
An evaluation of the effectiveness of the Company’s disclosure controls and procedures as of
December 31, 2005 was conducted under the supervision and with the participation of the Company’s
Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls
and procedures were adequate 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 the Company’s
Chief Executive Officer and Chief Financial Officer filed as Exhibits 31.1 and 31.2 to this report.
Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting and the Report of Independent
Registered Public Accounting Firm on Internal Control Over Financial Reporting are incorporated
herein by reference to the Annual Report.
Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting, identified in
connection with the evaluation of such control, that occurred during the Company’s last fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Item 9B. Other Information
Executive officers named in the Company’s Proxy Statement (“Named Officers”) are paid annual
bonuses under the Aetna Inc. Annual Incentive Plan (the “Plan”), based on performance goals
established by the Company’s Board of Directors’ Committee on Compensation and Organization (the
“Compensation Committee”) and the Compensation Committee’s discretion. On February 24, 2006, the
Compensation Committee established the 2006 performance goals for the Plan, which are based
primarily on consolidated net income and secondarily on consolidated revenue, each for the year
ended December 31, 2006. The maximum bonus payable to a Named
Officer under the Plan is $3
million. The Compensation Committee will determine individual bonus amounts in early 2007 based on
a review of corporate and individual performance. The Compensation Committee has the right to
reduce the maximum amount of any bonus payment under the Plan.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Executive Officers of Aetna Inc. is included in Part I pursuant to General
Instruction G to Form 10-K.
Information concerning Directors of Aetna Inc., compliance with Section 16(a) of the Securities
Exchange Act of 1934, the Company’s Code of Conduct (its written code of ethics), its audit
committee and audit committee financial experts, governance guidelines and related matters is
incorporated herein by reference to the information under the captions “Nominees for
Directorships”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Aetna’s Corporate
Governance Guidelines”, “Aetna’s Code of Conduct”, “Board and Committee Membership; Committee
Descriptions” and “Certain Transactions and Relationships” in the Proxy Statement.
Page 16
Item 11. Executive Compensation
The information under the captions “Nonmanagement Director Compensation in 2005,” “Other
Information Regarding Directors” and “Executive Compensation” in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information under the caption “Security Ownership of Certain Beneficial Owners, Directors,
Nominees and Executive Officers” and “Executive
Compensation – Equity Compensation Plans” in the Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information under the captions “Other Information Regarding Directors” and “Certain
Transactions and Relationships” in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information under the captions “Fees Incurred for 2005 and 2004 Services Performed by the
Independent Accountants” and “Nonaudit Services and Other Relationships Between the Company and
the Independent Accountants” in the Proxy Statement is incorporated herein by reference.
Part IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
Financial
statements
The Consolidated Financial Statements, Notes to Consolidated Financial Statements and Report of
Independent Registered Public Accounting Firm are incorporated herein by reference to the Annual
Report.
Financial
statement schedule
The supporting schedule of the consolidated entity is included in this Item 15. Refer to Index
to Financial Statement Schedules below.
Exhibits*
Exhibits to the Form 10-K are as follows:
| 3 |
|
Articles of Incorporation and
By-Laws |
| |
| 3.1 |
|
Amended and Restated Articles of Incorporation of Aetna Inc.,
incorporated herein by reference to Exhibit 99.2 to Aetna Inc.’s
Form 8-K filed on February 21, 2006. |
| |
| 3.2 |
|
Amended and Restated By-Laws of Aetna Inc., incorporated herein by
reference to Exhibit 3.1 to Aetna Inc.’s Form 8-K filed on October 4,
2005. |
| |
| 4 |
|
Instruments defining the rights of security holders, including
indentures |
| |
| 4.1 |
|
Form of Aetna Inc. Common Share certificate, incorporated herein by
reference to Exhibit 4.1 to Aetna Inc.’s Amendment No. 2 to
Registration Statement on Form 10 filed on December 1, 2000. |
| |
| 4.2 |
|
Senior Indenture between Aetna Inc. and U. S. Bank National
Association, successor interest to State Street Bank and Trust
Company, incorporated herein by reference to Exhibit 4.1 to Aetna
Inc.’s Form 10-Q filed on May 10, 2001. |
Page 17
| 4.3 |
|
Form of Subordinated Indenture between Aetna Inc. and U. S. Bank
National Association, successor interest to State Street Bank and
Trust Company, incorporated herein by reference to Exhibit 4.2 to
Aetna Inc.’s Registration Statement on Form S-3 filed on January 19,
2001. |
| |
| 10 |
|
Material
contracts |
| |
| 10.1 |
|
Form of Distribution Agreement between Aetna’s former parent company
and Aetna Inc., incorporated herein by reference to Annex C to Aetna’s
former parent company’s definitive proxy statement on Schedule 14A
filed on October 18, 2000. |
| |
| 10.2 |
|
Term Sheet for Agreement between Aetna’s former parent company and
Aetna Inc. in respect of the CityPlace property, situated at 185
Asylum Avenue, Hartford, Connecticut 06103, incorporated herein by
reference to Exhibit 10.10 to Aetna Inc.’s Registration Statement on
Form 10 filed on September 1, 2000. |
| |
| 10.3 |
|
$1,000,000,000 Amended and Restated Five-Year Credit Agreement dated as of
January 20, 2006, incorporated herein by reference to Exhibit 99.1 to
Aetna Inc.’s Form 8-K filed on January 23, 2006. |
| |
| 10.4 |
|
Amended and Restated Aetna Inc. 2000 Stock Incentive Plan, incorporated herein by
reference to Exhibit 10.1 to Aetna Inc.’s Form 10-Q filed on April 28, 2005. ** |
| |
| 10.5 |
|
Amended and Restated Aetna Inc. 2002 Stock Incentive Plan, incorporated herein by
reference to Exhibit 10.1 to Aetna Inc.’s Form 10-Q filed on October 30, 2003. ** |
| |
| 10.6 |
|
Form of Aetna Inc. 2001 Annual Incentive Plan, incorporated herein by reference to Annex
H to Aetna’s former parent company’s definitive proxy statement on Schedule 14A filed on
October 18, 2000. ** |
| |
| 10.7 |
|
Aetna Inc. Non-Employee Director Compensation Plan as Amended through February 17, 2006.
** |
| |
| 10.8 |
|
1999 Director Charitable Award Program, incorporated herein by
reference to Exhibit 10.1 to Aetna’s former parent company Form 10-Q
filed on April 28, 1999. ** |
| |
| 10.9 |
|
Employment Agreement dated as of September 6, 2000 by and between
Aetna’s former parent company and John W. Rowe, M.D., incorporated
herein by reference to Exhibit 10.23 to Aetna Inc.’s Amendment No. 1
to Registration Statement on Form 10 filed on October 18, 2000. **
|
| |
| 10.10 |
|
Memorandum dated December 6, 2002, from Elease E. Wright to John W.
Rowe, M.D., incorporated herein by reference to Exhibit 10.11 to
Aetna Inc.’s Form 10-K filed on February 28, 2003. ** |
| |
| 10.11 |
|
Amendment to Employment Agreement dated as of June 27, 2003 between
Aetna Inc. and John W. Rowe, M.D., incorporated herein by reference
to Exhibit 10.1 to Aetna Inc.’s Form 10-Q filed on July 31, 2003. ** |
| |
| 10.12 |
|
Amendment 2 to Employment Agreement dated as of January 3, 2006
between Aetna Inc. and John W. Rowe, M.D. ** |
| |
| 10.13 |
|
Amended and Restated Employment Agreement dated as of December 5,
2003 by and between Aetna Inc. and Ronald A. Williams, incorporated
herein by reference to Exhibit 10.24 to Aetna Inc.’s Form 10-K filed
on February 27, 2004. ** |
| |
| 10.14 |
|
Amendment to Employment Agreement dated as of January 27, 2006
between Aetna Inc. and Ronald A. Williams. ** |
| |
| 10.15 |
|
Incentive Stock Unit Agreement between Aetna Inc. and Ronald A.
Williams dated as of February 14, 2006, pursuant to the Aetna Inc.
2000 Stock Incentive Plan. ** |
Page 18
| 10.16 |
|
Employment Agreement dated as of September 28, 2001 between Aetna
Inc. and Alan M. Bennett, incorporated herein by reference to Exhibit
10.12 to Aetna Inc.’s Form 10-K filed on February 28, 2003.** |
| |
| 10.17 |
|
Letter agreement dated September 22, 2004 between Aetna Inc. and Alan
M. Bennett, incorporated herein by reference to Exhibit 99.1 of Aetna
Inc.’s Form 8-K filed on September 24, 2004. ** |
| |
| 10.18 |
|
Letter agreement dated April 23, 2004 between Aetna Inc. and Craig R.
Callen, incorporated herein by reference to Exhibit 10.14 to Aetna
Inc.’s Form 10-K filed on March 1, 2005. ** |
| |
| 10.19 |
|
Memorandum dated January 6, 1997 from Mary Ann Champlin to Timothy A.
Holt, incorporated herein by reference to Exhibit 10.14 to Aetna
Inc.’s Form 10-K filed on February 27, 2004. ** |
| |
| 10.20 |
|
Memorandum dated July 20, 2000 from Elease E. Wright to Timothy A.
Holt, incorporated herein by reference to Exhibit 10.15 to Aetna
Inc.’s Form 10-K filed on February 27, 2004. ** |
| |
| 10.21 |
|
Description of certain arrangements not embodied in formal documents,
as described under the headings “Nonmanagement Director Compensation
in 2005,” “Nonmanagement Director Compensation in 2006” and “Other
Information Regarding Directors” are incorporated herein by reference
to the Proxy Statement. ** |
| |
| * |
|
Exhibits other than those listed are omitted because they are not
required to be listed or are not applicable. Copies of exhibits will
be furnished without charge upon written request to the Office of the
Corporate Secretary, Aetna Inc., 151 Farmington Avenue, Hartford,
Connecticut 06156. |
| |
| ** |
|
Management contract or compensatory plan or arrangement. |
| |
| 11 |
|
Statement re: computation of per share
earnings |
| |
| 11.1 |
|
Incorporated herein by reference to Note 4 of Notes to Consolidated Financial Statements in the Annual Report. |
| |
| 12 |
|
Statement re: computation of ratios |
| |
| 12.1 |
|
Computation of ratios. |
| |
| 13 |
|
Annual report to security holders |
| |
| 13.1 |
|
Management’s Discussion and Analysis of Financial Condition and
Results of Operations, Selected Financial Data, Consolidated Financial
Statements, Notes to Consolidated Financial Statements, Management’s
Report on Internal Control Over Financial Reporting, Management’s
Responsibility for Financial Statements, Audit Committee Oversight,
Report of Independent Registered Public Accounting Firm on Internal
Control Over Financial Reporting, Report of Independent Registered
Public Accounting Firm and Quarterly Data (unaudited) are incorporated
herein by reference to the Annual Report and filed herewith in
electronic format. |
| |
| 14 |
|
Code of Ethics |
| |
| 14.1 |
|
Aetna Inc. Code of Conduct incorporated herein by reference to Exhibit
99.1 to Aetna Inc.’s Form 10-K filed on February 28, 2003. |
| |
| 21 |
|
Subsidiaries of the
registrant |
| |
| 21.1 |
|
Subsidiaries of Aetna Inc. |
| |
| 23 |
|
Consents of experts and counsel |
| |
| 23.1 |
|
Consent of Independent Registered Public Accounting Firm. |
| |
| 24 |
|
Power of Attorney |
Page 19
| 24.1 |
|
Power of Attorney. |
| |
| 31 |
|
Rule 13a – 14(a)/15d – 14(e) Certifications |
| |
| 31.1 |
|
Certification. |
| |
| 31.2 |
|
Certification. |
| |
| 32 |
|
Section 1350 Certifications |
| |
| 32.1 |
|
Certification. |
| |
| 32.2 |
|
Certification. |
Page 20
Index to Financial Statement Schedules
Page 21
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Aetna Inc.:
Under date of March 1, 2006, we reported on the consolidated balance sheets of Aetna Inc. and
subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income,
shareholders’ equity and cash flows for each of the years in the three-year period ended December
31, 2005, as contained in the 2005 Annual Report, Financial Report to Shareholders. These
consolidated financial statements and our report thereon are incorporated by reference in the
Annual Report on Form 10-K for the year 2005. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial statement schedule listed
in the accompanying index. The financial statement schedule is the responsibility of the Company’s
management. Our responsibility is to express an opinion on the financial statement schedule based
on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects,
the information set forth therein.
/s/ KPMG LLP
Hartford, Connecticut
March 1, 2006
Page 22
Schedule I – Condensed Financial Information of Aetna Inc.
Aetna Inc.
Condensed Statements of Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
| (Millions) |
|
2005 |
|
2004 |
|
2003 |
| |
Service fees-affiliates |
|
$ |
51.7 |
|
|
$ |
60.4 |
|
|
$ |
67.0 |
|
Net investment income |
|
|
26.2 |
|
|
|
25.5 |
|
|
|
21.0 |
|
Net realized capital gains (losses) |
|
|
— |
|
|
|
1.9 |
|
|
|
(.1 |
) |
| |
Total revenue |
|
|
77.9 |
|
|
|
87.8 |
|
|
|
87.9 |
|
| |
Operating expenses |
|
|
90.8 |
|
|
|
120.9 |
|
|
|
194.1 |
|
Interest expense |
|
|
122.8 |
|
|
|
104.7 |
|
|
|
102.9 |
|
| |
Total expenses |
|
|
213.6 |
|
|
|
225.6 |
|
|
|
297.0 |
|
| |
Loss before income tax benefit and equity in earnings of affiliates, net |
|
|
(135.7 |
) |
|
|
(137.8 |
) |
|
|
(209.1 |
) |
Income tax benefit |
|
|
45.9 |
|
|
|
38.8 |
|
|
|
76.0 |
|
Equity in earnings of affiliates, net (1) |
|
|
1,724.3 |
|
|
|
1,314.1 |
|
|
|
1,066.9 |
|
| |
Income from continuing operations |
|
|
1,634.5 |
|
|
|
1,215.1 |
|
|
|
933.8 |
|
Income from discontinued operations |
|
|
— |
|
|
|
1,030.0 |
|
|
|
— |
|
| |
Net income |
|
$ |
1,634.5 |
|
|
$ |
2,245.1 |
|
|
$ |
933.8 |
|
| |
|
|
|
| (1) |
|
Includes amortization of other acquired intangible
assets after tax of $37.3 million for 2005, $27.6
million for 2004 and $33.0 million for 2003. |
Refer to accompanying Notes to Condensed Financial Statements.
Page 23
Aetna Inc.
Condensed Balance Sheets
| |
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
| (Millions) |
|
2005 |
|
2004 |
| |
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
58.2 |
|
|
$ |
193.3 |
|
Investment securities |
|
|
101.3 |
|
|
|
559.4 |
|
Other receivables |
|
|
.9 |
|
|
|
137.0 |
|
Income taxes receivable |
|
|
58.9 |
|
|
|
107.4 |
|
Deferred income taxes |
|
|
10.5 |
|
|
|
— |
|
Other current assets |
|
|
37.2 |
|
|
|
42.7 |
|
| |
Total current assets |
|
|
267.0 |
|
|
|
1,039.8 |
|
| |
Long-term investments |
|
|
1.1 |
|
|
|
18.1 |
|
Investment in affiliates (1) |
|
|
11,322.9 |
|
|
|
10,314.2 |
|
Deferred income taxes |
|
|
— |
|
|
|
261.5 |
|
Other long-term assets |
|
|
1,294.3 |
|
|
|
178.5 |
|
| |
Total assets |
|
$ |
12,885.3 |
|
|
$ |
11,812.1 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
450.0 |
|
|
$ |
— |
|
Accrued expenses and other current liabilities |
|
|
220.6 |
|
|
|
438.0 |
|
| |
Total current liabilities |
|
|
670.6 |
|
|
|
438.0 |
|
| |
Long-term debt, less current portion |
|
|
1,155.7 |
|
|
|
1,609.7 |
|
Employee benefit liabilities |
|
|
658.5 |
|
|
|
661.8 |
|
Deferred income taxes |
|
|
273.4 |
|
|
|
— |
|
Other long-term liabilities |
|
|
22.2 |
|
|
|
21.2 |
|
| |
Total liabilities |
|
|
2,780.4 |
|
|
|
2,730.7 |
|
| |
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Common stock and additional paid-in capital ($.01 par value, 1.4 billion
shares authorized, 566.5 million shares issued and outstanding in 2005;
732.5 million shares authorized, 586.0 million shares issued and
outstanding in 2004) |
|
|
1,885.1 |
|
|
|
3,076.5 |
|
Retained earnings |
|
|
8,169.5 |
|
|
|
6,546.4 |
|
Accumulated other comprehensive income (loss) |
|
|
50.3 |
|
|
|
(541.5 |
) |
| |
Total shareholders’ equity |
|
|
10,104.9 |
|
|
|
9,081.4 |
|
| |
Total liabilities and shareholders’ equity |
|
$ |
12,885.3 |
|
|
$ |
11,812.1 |
|
| |
|
|
|
| (1) |
|
Includes goodwill and other acquired intangible assets
of $5.2 billion as of December 31, 2005 and $4.1 billion
as of December 31, 2004. |
Refer to accompanying Notes to Condensed Financial Statements.
Page 24
Aetna Inc.
Condensed Statements of Shareholders’ Equity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Common |
|
|
|
|
|
|
|
|
|
|
| |
|
Number of |
|
Stock and |
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
Common |
|
Additional |
|
|
|
|
|
Other |
|
Total |
|
|
| |
|
Shares |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Shareholders’ |
|
Comprehensive |
| (Millions) |
|
Outstanding |
|
Capital |
|
Earnings |
|
Income (Loss) |
|
Equity |
|
Income (Loss) |
| |
Balance at December 31, 2002 |
|
|
599.9 |
|
|
$ |
4,070.9 |
|
|
$ |
3,379.5 |
|
|
$ |
(470.4 |
) |
|
$ |
6,980.0 |
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
933.8 |
|
|
|
— |
|
|
|
933.8 |
|
|
$ |
933.8 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on securities (1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5.6 |
|
|
|
5.6 |
|
|
|
|
|
Net foreign currency gains |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.3 |
|
|
|
4.3 |
|
|
|
|
|
Net derivative gains (1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
.7 |
|
|
|
.7 |
|
|
|
|
|
Pension liability adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51.8 |
|
|
|
51.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
62.4 |
|
|
|
62.4 |
|
|
|
62.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
996.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued for benefit plans |
|
|
41.0 |
|
|
|
399.1 |
|
|
|
— |
|
|
|
— |
|
|
|
399.1 |
|
|
|
|
|
Repurchases of common shares |
|
|
(30.6 |
) |
|
|
(445.2 |
) |
|
|
— |
|
|
|
— |
|
|
|
(445.2 |
) |
|
|
|
|
Dividends declared ($.01 per share) |
|
|
— |
|
|
|
— |
|
|
|
(6.1 |
) |
|
|
— |
|
|
|
(6.1 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
610.3 |
|
|
|
4,024.8 |
|
|
|
4,307.2 |
|
|
|
(408.0 |
) |
|
|
7,924.0 |
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
2,245.1 |
|
|
|
— |
|
|
|
2,245.1 |
|
|
$ |
2,245.1 |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on securities (1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(41.9 |
) |
|
|
(41.9 |
) |
|
|
|
|
Net foreign currency gains |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
|
|
Net derivative gains (1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.2 |
|
|
|
1.2 |
|
|
|
|
|
Pension liability adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(94.3 |
) |
|
|
(94.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(133.5 |
) |
|
|
(133.5 |
) |
|
|
(133.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,111.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued for benefit plans |
|
|
40.2 |
|
|
|
546.5 |
|
|
|
— |
|
|
|
— |
|
|
|
546.5 |
|
|
|
|
|
Repurchases of common shares |
|
|
(64.5 |
) |
|
|
(1,494.8 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,494.8 |
) |
|
|
|
|
Dividends declared ($.01 per share) |
|
|
— |
|
|
|
— |
|
|
|
(5.9 |
) |
|
|
— |
|
|
|
(5.9 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
586.0 |
|
|
|
3,076.5 |
|
|
|
6,546.4 |
|
|
|
(541.5 |
) |
|
|
9,081.4 |
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
1,634.5 |
|
|
|
— |
|
|
|
1,634.5 |
|
|
$ |
1,634.5 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on securities (1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(141.6 |
) |
|
|
(141.6 |
) |
|
|
|
|
Net foreign currency gains |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
.7 |
|
|
|
.7 |
|
|
|
|
|
Net derivative losses (1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(.3 |
) |
|
|
(.3 |
) |
|
|
|
|
Pension liability adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
733.0 |
|
|
|
733.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
591.8 |
|
|
|
591.8 |
|
|
|
591.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,226.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued for benefit plans |
|
|
22.3 |
|
|
|
477.7 |
|
|
|
— |
|
|
|
— |
|
|
|
477.7 |
|
|
|
|
|
Repurchases of common shares |
|
|
(41.8 |
) |
|
|
(1,669.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,669.1 |
) |
|
|
|
|
Dividends declared ($.02 per share) |
|
|
— |
|
|
|
— |
|
|
|
(11.4 |
) |
|
|
— |
|
|
|
(11.4 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
566.5 |
|
|
$ |
1,885.1 |
|
|
$ |
8,169.5 |
|
|
$ |
50.3 |
|
|
$ |
10,104.9 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
| (1) |
|
Net of reclassification adjustments. |
Refer to accompanying Notes to Condensed Financial Statements.
Page 25
Aetna Inc.
Condensed Statements of Cash Flows
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, |
| (Millions) |
|
2005 |
|
2004 |
|
2003 |
| |
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,634.5 |
|
|
$ |
2,245.1 |
|
|
$ |
933.8 |
|
Adjustments to reconcile net income to net cash provided by (used for) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
— |
|
|
|
(1,030.0 |
) |
|
|
— |
|
Equity earnings of affiliates (1) |
|
|
(1,724.3 |
) |
|
|
(1,314.1 |
) |
|
|
(1,066.9 |
) |
Net realized capital (gains) losses |
|
|
— |
|
|
|
(1.9 |
) |
|
|
.1 |
|
Net change in other assets and other liabilities |
|
|
128.1 |
|
|
|
(95.5 |
) |
|
|
(628.4 |
) |
| |
Net cash provided by (used for) operating activities of continuing operations |
|
|
38.3 |
|
|
|
(196.4 |
) |
|
|
(761.4 |
) |
Discontinued operations, net |
|
|
68.8 |
|
|
|
666.2 |
|
|
|
— |
|
| |
Net cash provided by (used for) operating activities |
|
|
107.1 |
|
|
|
469.8 |
|
|
|
(761.4 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds (cost) of investments, net |
|
|
458.1 |
|
|
|
(61.1 |
) |
|
|
(263.9 |
) |
Dividends received from affiliates, net |
|
|
1,085.2 |
|
|
|
528.9 |
|
|
|
1,007.4 |
|
Cash used for acquisitions, net of cash acquired |
|
|
(395.4 |
) |
|
|
— |
|
|
|
— |
|
Other, net |
|
|
— |
|
|
|
— |
|
|
|
.1 |
|
| |
Net cash provided by investing activities |
|
|
1,147.9 |
|
|
|
467.8 |
|
|
|
743.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued under benefit plans |
|
|
271.3 |
|
|
|
316.0 |
|
|
|
293.6 |
|
Common shares repurchased |
|
|
(1,650.0 |
) |
|
|
(1,493.0 |
) |
|
|
(445.2 |
) |
Dividends paid to shareholders |
|
|
(11.4 |
) |
|
|
(5.9 |
) |
|
|
(6.1 |
) |
| |
Net cash used for financing activities |
|
|
(1,390.1 |
) |
|
|
(1,182.9 |
) |
|
|
(157.7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(135.1 |
) |
|
|
(245.3 |
) |
|
|
(175.5 |
) |
Cash and cash equivalents, beginning of period |
|
|
193.3 |
|
|
|
438.6 |
|
|
|
614.1 |
|
| |
Cash and cash equivalents, end of period |
|
$ |
58.2 |
|
|
$ |
193.3 |
|
|
$ |
438.6 |
|
| |
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
121.0 |
|
|
$ |
104.0 |
|
|
$ |
103.5 |
|
Income taxes paid (received) |
|
|
246.6 |
|
|
|
(331.3 |
) |
|
|
488.1 |
|
| |
|
|
|
| (1) |
|
Includes amortization of other acquired intangible
assets after tax of $37.3 million, $27.6 million and
$33.0 million for the years ended December 31, 2005,
2004 and 2003, respectively. |
Refer to accompanying Notes to Condensed Financial Statements.
Page 26
Aetna Inc.
Notes to Condensed Financial Statements
1. Organization
The condensed financial statements reflect financial information for Aetna Inc. (a Pennsylvania
corporation) only (the “Parent Company”). The condensed financial information presented herein
includes the balance sheet of Aetna Inc. as of December 31, 2005 and 2004 and the related
statements of income, shareholders’ equity and cash flows for the years ended December 31, 2005,
2004 and 2003. The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto in the Annual Report.
All share and per share amounts in the accompanying condensed financial statements have been
adjusted to reflect a 2005 and a 2006 two-for-one stock split for all periods presented. Refer
to Note 1 of Notes to Consolidated Financial Statements in the Annual Report for additional
information on these stock splits.
2. Summary of Significant Accounting Policies
Refer to Note 2 of Notes to Consolidated Financial Statements in the Annual Report for the
summary of significant accounting policies.
3. Acquisitions and Dispositions
Refer to Note 3 of Notes to Consolidated Financial Statements in the Annual Report for a
description of acquisitions and dispositions.
4. Income Taxes
Refer to Note 11 of Notes to Consolidated Financial Statements in the Annual Report for a
description of income taxes.
5. Other Comprehensive Income (Loss)
Refer to Note 10 of Notes to Consolidated Financial Statements in the Annual Report for a
description of accumulated other comprehensive income (loss).
6. Debt
Refer to Note 13 of Notes to Consolidated Financial Statements in the Annual Report for a
description of debt.
Page 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 1, 2006 |
|
Aetna Inc. |
|
|
|
|
|
|
|
By:
|
|
/s/ Ronald M. Olejniczak |
|
|
|
|
|
|
|
|
|
Ronald M. Olejniczak |
|
|
|
|
Vice President and Controller |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
| |
|
|
|
|
| Signer |
|
Title |
|
Date |
| |
|
|
|
|
|
/s/ John W. Rowe, M.D.
John W. Rowe, M.D.
|
|
Chairman and Director
|
|
March 1, 2006 |
|
|
|
|
|
/s/ Ronald A. Williams
Ronald A. Williams
|
|
Chief Executive Officer, President and
Director (Principal Executive Officer)
|
|
March 1, 2006 |
|
|
|
|
|
/s/ Alan M. Bennett
Alan M. Bennett
|
|
Senior Vice President and Chief
Financial
Officer
(Principal Financial Officer)
|
|
March 1, 2006 |
|
|
|
|
|
/s/ Ronald M. Olejniczak
Ronald M. Olejniczak
|
|
Vice President and Controller
(Principal
Accounting Officer)
|
|
March 1, 2006 |
|
|
|
|
|
Betsy Z. Cohen *
|
|
Director |
|
|
Molly J. Coye, M.D. *
|
|
Director |
|
|
Barbara Hackman Franklin *
|
|
Director |
|
|
Jeffrey E. Garten *
|
|
Director |
|
|
Gerald Greenwald *
|
|
Director |
|
|
Ellen M. Hancock *
|
|
Director |
|
|
Michael H. Jordan *
|
|
Director |
|
|
Edward J. Ludwig *
|
|
Director |
|
|
Joseph P. Newhouse *
|
|
Director |
|
|
| |
|
|
|
|
* By:
|
|
/s/ Ronald M. Olejniczak
|
|
|
|
|
Ronald M. Olejniczak |
|
|
|
|
Attorney-in-fact |
|
|
|
|
March 1, 2006 |
|
|
Page 28
INDEX TO EXHIBITS
| |
|
|
|
|
| Exhibit |
|
|
|
Filing |
| Number |
|
Description of Exhibit |
|
Method |
|
|
|
|
|
10
|
|
Material Contracts |
|
|
|
|
|
|
|
10.7
|
|
Aetna Inc. Non-Employee Director Compensation Plan as
Amended through February 17, 2006.
|
|
Electronic |
|
|
|
|
|
10.12
|
|
Amendment 2 to Employment Agreement dated as of
January 3, 2006 between Aetna Inc. and John W. Rowe,
M.D.
|
|
Electronic |
|
|
|
|
|
10.14
|
|
Amendment to Employment Agreement dated as of January
27, 2006 between Aetna Inc. and Ronald A. Williams.
|
|
Electronic |
|
|
|
|
|
10.15
|
|
Incentive Stock Unit Agreement between Aetna Inc. and
Ronald A. Williams dated as of February 14, 2006,
pursuant to the Aetna Inc. 2000 Stock Incentive Plan.
|
|
Electronic |
|
|
|
|
|
12
|
|
Statement re: computation of ratios |
|
|
|
|
|
|
|
12.1
|
|
Computation of ratios.
|
|
Electronic |
|
|
|
|
|
13
|
|
Annual report to security holders |
|
|
|
|
|
|
|
13.1
|
|
Management’s Discussion and Analysis of Financial
Condition and Results of Operations, Selected Financial
Data, Consolidated Financial Statements, Notes to
Consolidated Financial Statements, Management’s Report
on Internal Control Over Financial Reporting,
Management’s Responsibility for Financial Statements,
Audit Committee Oversight, Report of Independent
Registered Public Accounting Firm on Internal Control
Over Financial Reporting, Report of Independent
Registered Public Accounting Firm and Quarterly Data
(unaudited) sections of the Annual Report.
|
|
Electronic |
|
|
|
|
|
21
|
|
Subsidiaries of the registrant |
|
|
|
|
|
|
|
21.1
|
|
Subsidiaries of Aetna Inc.
|
|
Electronic |
|
|
|
|
|
23
|
|
Consents of experts and counsel |
|
|
|
|
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
Electronic |
|
|
|
|
|
24
|
|
Power of Attorney |
|
|
|
|
|
|
|
24.1
|
|
Power of Attorney.
|
|
Electronic |
|
|
|
|
|
31
|
|
Rule 13a — 14(a)/15d
— 14(e) Certifications |
|
|
|
|
|
|
|
31.1
|
|
Certification.
|
|
Electronic |
|
|
|
|
|
31.2
|
|
Certification.
|
|
Electronic |
|
|
|
|
|
32
|
|
Section 1350 Certifications |
|
|
Page 29
| |
|
|
|
|
| Exhibit |
|
|
|
Filing |
| Number |
|
Description of Exhibit |
|
Method |
|
|
|
|
|
32.1
|
|
Certification.
|
|
Electronic |
|
|
|
|
|
32.2
|
|
Certification.
|
|
Electronic |
Page 30