LUNCHEON HOSTED BY FOX-PITT KELTON
TALKING POINTS
JUNE 14, 1996
INTRODUCTION - D. HUBER
bullet Good morning or afternoon. I am glad to be here today. Joining
me is Joe Sebastianelli, currently Co-President of U.S.
Healthcare. Joe will be one of the Co-Presidents of the
combined health operation.
bullet Also joining me is Jim Dickerson, currently Principal Financial Officer
of U.S. Healthcare. Jim will become CFO of the combined health
operation. You will be hearing from them later.
STRATEGIC BENEFITS - D. HUBER
bullet With the combination of Aetna and U.S. Healthcare, we are establishing
a platform for growth, innovation and superior financial performance
based on our ability to meet the growing need for high quality
health care services at a reasonable cost.
bullet As you know, this transaction is the culmination of a strategic process
begun last year to reposition Aetna for growth and improved
profitability. As we explored our options, it became increasingly
clear that U.S. Healthcare was the best possible partner for Aetna
and that this union will enhance long-term value for shareholders of
both companies. It instantly transforms our respective companies
into a single dynamic force in health care, with the potential to
redefine the way in which health care is delivered.
bullet The strategic benefits of this combination are compelling. The
combined operation will have the national scope, management
strength, depth of resources and leading information systems needed
to support today's business and create a "next generation" health
care company. With this transaction, Aetna's growth rate will be
substantially enhanced.
HEALTH/SPECIALTY HEALTH MEMBERSHIP (SLIDE 1)
bullet This combination will create the leading health care benefits company
in the U.S. with capabilities across the full spectrum of health and
specialty health products. The combined company will have 10.5
million managed care members, with over 5 million members which are
at risk.
bullet Overall, we will have 14.1 million health members; 27.3 million
specialty health members which includes behavioral science, dental,
and pharmacy. We will serve 23 million Americans or one in every
12, with our health care products and services. Together, Aetna and
U.S. Healthcare will be a significant player in all 50 states, and
rank among the top managed care providers in terms of membership in
13 states.
COMBINED AETNA/U.S. HEALTHCARE REVENUE (SLIDE 2)
bullet The combined entity would have had $16.6 billion in revenues in 1995
with nearly 70% or $11.2 billion representing the health business.
HEALTHCARE TEAM (SLIDE 3)
bullet The combined health business will be led by one of the strongest
management teams in the industry today, with the expertise and
ability to drive our business into the future. We are committed to
utilizing the best management talent from both companies as you can
see by this organizational chart.
bullet Mike Cardillo and Joe Sebastianelli, currently Co-Presidents of U.S.
Healthcare, will be Co-Presidents of the combined health business.
This will include HMO, POS, indemnity, specialty health, Medicare
products and Group Life Insurance, as well as the marketing, network
management and servicing associated with these products.
GEOGRAPHIC REGIONS (SLIDE 4)
bullet As you can see on this slide, we developed a structure which divides
the business into six regions placing additional resources,
functions and delivery mechanisms in the field. This structure will
position our health business to excel in meeting customer needs in
each local market.
bullet Our regional organization draws on the operational strengths and
management talents of both Aetna and U.S. Healthcare.
NEW ORGANIZATIONAL STRUCTURE (SLIDE 5)
bullet The structure combines the advantages of centralized policy making
with regional implementation.
bullet A small Core Strategy Team will lead the business by setting strategy
and policy and developing common standards.
bullet The regional office will see that those policies and standards are
applied consistently across the country while adapting them to local
market conditions.
bullet The regional managers have been named and will report to Mike
Cardillo and Joe Sebastianelli. They will be responsible for all
sales, network management, regional underwriting, provider
contracting, and physician relations within their regions.
bullet Each local market area will be headed by a general manager, reporting
to the regional manager. The general managers will be responsible
for similar functions at the local level. We expect to name 36
local market managers by July 1.
bullet The medical management and operations functions will have separate
and distinct regional units, reporting to their counterparts on the
Core Team. We expect to name the regional medical directors and
operations heads by July 1 also.
bullet Each region's medical executive will be responsible for all clinical
management, including patient management, clinical guidelines,
credentialing and National Committee for Quality Assurance (NCQA)
accreditation. The medical executive will report to Dr. Abbie
Leibowitz, chief medical officer for the combined health business.
bullet In addition, each region will have an Operations executive, who will
be responsible for all member and employer services and claims
payments. These individuals will report to Scott Striegel, head of
Operations.
STRATEGIC FIT (SLIDE 6)
bullet So, why does this partnership make sense?
bullet Aetna has an outstanding national brand identity and an excellent
track record in managing multi-site national commercial customers,
with complex servicing needs.
bullet Aetna Health Plans serves over 20 million Americans and has a 25%
share of the Fortune 1,000 companies with a very strong retention
record with these customers. Aetna also has a broad specialty
health product line that complements our strengths in managed care.
bullet What does U.S. Healthcare bring to the partnership? U.S. Healthcare
is the premier managed care company in the country serving over 2.9
million HMO and POS risk members in highly attractive markets. They
excel in many areas including medical management, retail marketing
to members, and have excellent information systems.
bullet U.S. Healthcare membership has been growing at a rate of over 20% a
year, best of breed operating margins and one of the best cost
management systems in the industry. The powerful combination of
these complementary strengths uniquely positions the combined health
businesses with a broad array of high quality health and specialty
health products serving the full range of single and multi-site
customers throughout the U.S.
bullet Together, we are dedicated to being the #1 plan of choice for
consumers, employers, and health care providers.
COMMITMENT TO QUALITY
bullet Both companies are committed to ensuring that the care received by
our members continues to meet the highest standards.
bullet Following in-depth reviews, the most prestigious managed care
accreditation body in the nation, NCQA, granted full accreditation
to four of U.S. Healthcare's plans and one-year accreditation to
two plans. U.S. Healthcare also ranked at or above average on
seven of eight key member satisfaction measures, including overall
evaluation of the plan, ease of seeing a doctor chosen by the
patient and intent to stay with the plan.
bullet Aetna is also dedicated to quality and has received full, three-year
accreditation from NCQA for 7 of its managed health plans and
one-year accreditation for two plans.
bullet Our focus will continue to be on the health of our members. We intend
to set the standard against which all other health care companies
will be measured in terms of quality of care, choice of plans and
providers, and service. We will continue to be the industry leader
in providing customers with the information and preventive health
care services they need to lead healthier lives.
INTRODUCTION OF JIM DICKERSON
bullet Jim Dickerson will now discuss in more detail the financial elements
of the transaction and the enhancements between the two companies.
FINANCIAL ELEMENTS OF THE TRANSACTION - J. DICKERSON
HMO FINANCIAL RATIOS (SLIDE 7)
bullet Before I discuss the revenue enhancements and expense reduction, let me
show you some HMO statistics on both companies.
bullet In first quarter 1996, Aetna's HMO business had a MLR of 87.0% and an
SG&A ratio of 13.6% of revenues and a net income margin of 1.8%
bullet In contrast, U.S. Healthcare operated at a 76.7% MLR, an SG&A ratio of
11.5% of revenues and a net income margin of 7.8%.
bullet So, as you can see, there is tremendous opportunity for performance
enhancements and accelerated growth.
REVENUE ENHANCEMENTS AND EXPRESS OPPORTUNITIES (SLIDE 8)
bullet The combined company provides us with significant earnings growth
and expense opportunities. In addition to normal expected growth
from these businesses, through this combination we expect to further
improve financial results of the combined business by over $300
million after tax -- on an annualized basis -- within 18 months from
the closing.
bullet Integration planning towards realizing these enhancements is
well underway. Joe will speak about integration later.
bullet We expect revenue enhancements to be about one-third and expense
reductions, both medical and SG&A, to account for the remaining
two-thirds of these enhancements.
bullet We used a bottom-up and top-down approach to determine the synergies.
bullet Aetna reviewed the synergies with us and outside parties, so we think
the numbers are realistic.
AFTER TAX ENHANCEMENTS (SLIDE 9)
Revenue Growth
bullet Revenue enhancements of $100 million after tax, are expected
to be achieved through accelerating membership growth across all
customer spectrums.
bullet Aetna's strong Fortune 1,000 relationships nationwide provide an
outstanding platform to leverage U.S. Healthcare's retail marketing and
medical management capabilities accelerating membership growth
throughout the country. Notably,
-- Access to large case/national accounts to quality HMO products.
-- Grow Seniors/Medicare nationwide with national brand.
-- Access to small groups and individuals from national brand.
-- Cross-sell to specialty products.
bullet Early feedback on cross selling opportunities from our customers
is favorable. They see the strengths of both organizations and our
ability to leverage -- HMO to National Accounts.
bullet In addition, selling group insurance products to U.S. Healthcare
customers seems to be a real opportunity.
SG&A Savings
bullet SG&A savings of $140 million after tax, are expected to be achieved
from sales and back office automation, further leveraging
technology, and overlap market savings. The combined health
operation would have had $2.2 billion in SG&A expenses in 1995.
bullet Jim -- may want to add examples
bullet We are currently focusing on our assessment of synergy redundancies
in corporate staff functions and overlapping markets.
Medical Cost Improvements
bullet Medical cost improvements of $60 million after tax, are expected to
be achieved through improved provider contracting strategies, more
effective utilization management techniques, and optimizing use of
networks.
bullet Our early assessment indicates that we can apply U.S. Healthcare's
medical techniques to Aetna's HMO's in overlap and non-overlap markets.
bullet Network overlaps are also currently being assessed.
bullet Bottomline, our synergy estimates we disclosed with you when we made
the announcement are still the same.
CASH FLOW (SLIDE 10)
bullet Cash flows from operations, i.e., after shareholder dividends and
preferred dividends, are expected to be roughly $800-900 million
per year. This cash will be available to reinvest in all of Aetna's
businesses and/or to reduce debt.
bullet Goodwill amortization resulting from this transaction is estimated
to be less than anticipated annualized synergies and will have no
cash flow impact.
bullet Consistent with our new growth strategy, the dividend policy is
intended to be changed by Aetna's board to maintain a payout ratio
of 10% to 20% of operating earnings before amortization of goodwill
and other intangibles, upon completion of this transaction. Annual
dividend payment will be between $0.80 and $0.85 per share.
FINANCIAL TARGETS
bullet 1996 is clearly a transition year. As a result, the first full year
of operating improvements will be 1997.
bullet This transaction should provide the combined company with very strong
top line annualized growth and strong earnings growth.
bullet Furthermore, these strong earnings should occur despite goodwill
amortization charges which have no impact on cash flow.
INTRODUCTION OF JOE SEBASTIANELLI
bullet Joe Sebastinelli will now discuss where we stand on integration and
the regulatory/shareholder approval process.
INTEGRATION AND REGULATORY UPDATE -- J. SEBASTINELLI
bullet Integration is going extremely well. There has been a high degree
of cooperation between teams.
CORE INTEGRATION TEAM (SLIDE 11)
bullet The integration team leaders are Mike Cardillo, Dick Huber, Tom
McInerney, and me. Our goal is to have a comprehensive integration
plan completed by July 1, 1996.
bullet The integration team is working with the new management team to
ensure that revenue enhancements, medical cost reductions, and SG&A
expense savings are maximized and achieved very quickly. They will
also ensure that we maintain the high quality service that customers
and providers have come to expect from both U.S. Healthcare and
Aetna.
bullet The Core Integration Team consists of key members of Aetna and
U.S. Healthcare management.
bullet There are seven functional teams that have been established to
identify and resolve various issues in certain key areas.
INTEGRATION SUBTEAMS (SLICE 12)
bullet Let me give you an idea of the magnitude of the integration structure
and process:
-- There are about 70 subteams.
-- Approximately 180 people are involved in the integration process
from both organizations.
-- Each team meets at least weekly to discuss status of outstanding
issues.
-- As an example of the detailed planning, let me briefly take you
through the medical subteams.
-- Joe -- please provide details
PRINCIPLES OF INTEGRATION (SLIDE 13)
bullet We believe that one key to success in any merger is that actions
are guided by an agreed-upon set of values and principles that are
understood and embraced by everyone.
bullet This slide shows the common principles Aetna and U.S. Healthcare
have jointly adopted to follow during the integration.
INTEGRATION PLANNING MILESTONES (SLIDE 14)
bullet In terms of progress, we have:
-- formed the core teams and subteams,
-- achieved alignment on vision and strategy,
-- performed an early assessment of synergies, and
-- designed expanded organization structure, as Dick just described.
INTEGRATION PLANNING NEXT STEPS (SLIDE 15)
bullet We are on track to finalize:
-- synergy assessment and action plan, and
-- integration plan by July 1.
bullet The integration plan will include by function a mission statement,
strategic objectives, a financial plan including how synergies will
be achieved, and an organization structure with a migration
strategy.
REGULATORY MILESTONES (SLIDE 16)
bullet In terms of the regulatory process, we are pleased that the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act with
respect to the merger has expired.
bullet State regulatory filings have been made. The reviews are ongoing
and on schedule.
bullet Regulatory clearance of "change of control" of USHC subsidiaries have
already been granted by DE, VA, NY, NJ, MN, MD, RI, and MA.
bullet Approval is pending in CT, GA, NC, NH, OH, PA, SC.
bullet Connecticut and Georgia hearings were held in the last week. (ad
lib on hearings)
REGULATORY NEXT STEPS (SLIDE 17)
bullet The proxy/prospectus in conjunction with the merger was declared
effective by the SEC on Wednesday (June 12), and distributed to
shareholders yesterday and today (June 13/14).
bullet Shareholders of both companies will vote on the merger. The
shareholder meetings will be held on July 18.
bullet When all required approvals are obtained, the transaction will close.
We currently do not expect any problems and are on track for the
third quarter close. So far we are optimistic that the closing will
be in the early third quarter timeframe.
bullet That concludes our prepared remarks. We would be happy to answer
any questions you may have.
QUESTIONS & ANSWERS
GRAPHIC DESCRIPTION
logo of logo of
AETNA LIFE AND CASUALTY COMPANY US HEALTHCARE, INC.
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
HEALTH/SPECIALTY HEALTH MEMBERSHIP
GRAPHIC DESCRIPTION
BAR GRAPH POINTS 0 to 30 ILLUSTRATES
MANAGED CARE
INDEMNITY
SPECIALTY HEALTH
7.6 Aetna Managed Care
2.9 US Healthcare Managed Care
10.5 Total Managed Care
3.6 Total Health Indemnity
27.3 Total Specialty Health --
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
COMBINED AETNA/U.S. HEALTHCARE REVENUE*
PIE CHART ILLUSTRATES
Aetna
International 9% the 68% is separately illustrated:
ARS 23% U.S. Healthcare 22%
Health Aetna & U.S. Healthcare 68% Aetna Health Plans 46%
*1995 Combined Revenue of $16.6 billion
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
HEALTH CARE TEAM
Michael J. Cardillo Joseph T. Sebastianelli
Co-Presidents
AETNA U.S. HEALTHCARE
bullet Frolly M. Boyd, Group Life bullet James Dickerson,
bullet A. Bruce Campbell, Chief Financial Officer
Specialty Health & bullet Arthur N. Leibowitz, M.D.,
Healthways Chief Medical Officer
bullet Allen P. Maltz, bullet Timothy E. Nolan, Sales
Chief Actuary bullet David F. Simon, General Counsel
bullet Thomas J. McInerney, bullet Richard A. Wolfson, Pharmacy
National Accounts
bullet Daniel S. Messina,
Deputy CFO
bullet Scott A. Striegel,
Operations
bullet Max Gold,
Information Technology
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
GEOGRAPHIC REGIONS
MAP OF THE UNITED STATES DIVIDED INTO DIVISIONS
Western West Central Mid-West Mid-Atlantic Northeast Southeast
Tom Williams John Coyle Ed Dulik Chuck Scott Sal Uglietta Scott Murphy
- ------------ ------------ -------- ------------ ------------ ------------
AK MT KY NY ME VA
HI WY TN DE NH NC
WA NB OH PA VT SC
OR AK IN NJ GA
ID IA IL MA AL
CA CO MI RI FL
NV NM WI MS
UT ND WV MD
AZ SD
TX
OR
MN
MO
LA
KA
OK
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
NEW ORGANIZATIONAL STRUCTURE
Core Regional Local
bullet Sets strategy, Delivers health care and Focuses on functions
policy and customer service that need to be close
business to the customer:
standards sales and provider
contracting and
relations
CORE TEAM
---------
REGIONAL
MEDICAL MANAGERS OPERATIONS
(6) (6) (6)
bullet Quality Local Management Fulfillment/Distribution
bullet Medical Directors Underwriting Claims
bullet Disease Management Regional Financial Staff Employer Services
bullet Patient Management Member Services
bullet Provider services
GENERAL MANAGERS
bullet sales
-- Multi-site
-- Public Sector
-- New Business
-- Speciality Products
bullet Medical Director
bullet Provider Services
bullet Network Hospital Manager
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
STRATEGIC FIT
AETNA'S STRENGTHS US HEALTHCARE'S STRENGTHS
bullet National Presence Medical Management
bullet Strong National Brand Name Retail Marketing
bullet Servicing Multi-Site national Clinical Information Systems
Commercial Customers
bullet Diverse Product Portfolio Competitive Price and Strong
Operating Margins
bullet Large National Account Quality Measurement and Analysis
Retiree Base
bullet Strong Medicare Growth Results
COMBINED STRENGTHS
bullet Quality of Healthcare
bullet Geographic Diversification and Critical Mass
bullet Strong Management Talent
bullet Revenue and Expense Synergies
bullet Strong Medicare Growth Opportunity
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
HMO FINANCIAL RATIOS*
AETNA US HEALTHCARE
----- -------------
Medical Loss Ratio......... 87.0% 76.7%
SG&A....................... 13.6% 11.5%
Net Income Margin.......... 1.7% 7.8%
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
GRAPHIC DESCRIPTION
REVENUE ENHANCEMENTS AND EXPENSE OPPORTUNITIES
PIE CHART
Expense Opportunities 1/3 Revenue Enchancements 2/3
Total after-tax enhancements of $300 million expected within 18 months.
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
AFTER TAX ENHANCEMENTS
GRAPHIC DESRIPTION
CHART 0 TO 300
Year
-----------------------
1996 1997 1998
SG&A ................
Medical Costs........
Revenue Growth.......
Reflecting the following:
1996 1997 1998
---- ---- ----
Other/IT
Sales & Back Office 1 20 40
Overlap Markets 1 60 70
Medical 9 23 60
Cross Sell - 20 20
National/Commercial Accts. 1 10 30
Medicare - 12 50
GRAPHIC DESCRIPTION
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
CASH FLOW FROM OPERATIONS
$ Millions
1995 Combined Operating Earnings............................ $885
Revenue Enhancements and Expense Opportunities.............. 300
Additional Interest Expense................................. (65)
Adjusted Operating Earnings................................. 1,090
Mandatorily Convertible Preferred Stock..................... (55)
Dividends (10-20% Payout)..................................(110)-(220)
---------
Pro-Forma Cash Flow from Operations.........................$815-$925
=========
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
CORE INTEGRATION TEAM
TEAM LEADERS
bullet Michael Cardillo Tom McInerney
bullet Dick Huber Joe Sebastianelli
FUNCTIONAL TEAMS
bullet Medical
bullet Sales
bullet Operations/Information Technology
bullet Finance
bullet Legal/Regulatory
bullet Human Resources
bullet Communications/Advertising/Public Relations
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
INTEGRATION SUBTEAMS
TEAM LEADERS
OPERATIONS/ COMMUNICATIONS
INFORMATION LEGAL/ HUMAN ADVERTISING/
MEDICAL SALES TECHNOLOGY FINANCE REGULATORY RESOURCES PUBLIC
RELATIONS
Quality
Credentialing
Provider
Relations
Network
Integration bullet High degree of cooperation between teams
Utilization bullet 70 Subteams
Management bullet 180 people involved from both organizations
Government bullet Weekly meetings
Programs
Pharmacy
Dental
Mental Health
Vision
Medical
Delivery
Outcomes
Policies
and Procedures
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
PRINCIPLES OF INTEGRATION
bullet Maintain focus on running today's businesses
bullet Quality of care
bullet Respect and dignity for employees
bullet Open and honest communication
bullet Best practices of both organizations
bullet Common approaches for medical delivery, sales and information
systems
bullet Core business direction adapted to local market conditions
bullet Service excellence
bullet External focus on members, employers, providers and shareholders
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
INTEGRATION PLANNING MILESTONES ILLUSTRATED BY
FORWARD LOOKING ARROW
4/1 4/11 4/20 4/30 5/30
bullet bullet
Aetna/ First Integration Subteams Early Expanded
U.S. Healthcare Team Meeting Alignment on Assessment Organization
Merger Held Vision and Enhancements Structure
Announced Core Team and Strategy Performed Finalized
Formed
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
INTEGRATION PLANNING NEXT STEPS
6/30 7/1 Integration
Begins
bullet
Enhancement Assessment to be finalized Full Integration Plan to be
Action Plan to Achieve Enhancements Completed
to be Completed
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
REGULATORY MILESTONES
April 5/13 6/6 6/11 6/12 6/13
bullet
Aetna/U.S. Hart-Scott- CT GA Proxy Proxy
Healthcare Rodino Hearing Hearing Prospectus Prospectus
Merger Waiting Declared Distributed
Announced Period Effective by
(4/1) Expired SEC
Hart-Scott-
Rodino Filed
(4/12)
State
Regulatory
Filings Made
(Week of 4/22)
June
Various State Approvals Granted
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
REGULATORY NEXT STEPS
Expected Early
Third Quarter
Close
June-July 7/18 July
Additional State Shareholder Transaction Expected
Filings to Meetings to Close
be Approved
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AETNA LIFE & CASUALTY COMPANY U.S. HEALTHCARE, INC.
