Aetna Announces 4Q 2000 Earnings

HARTFORD, Conn., January 30, 2001 ― Aetna (NYSE: ΑET), reporting for the first time as an independent health care and related benefits company, announced today fourth quarter 2000 operating earnings from continuing operations, excluding other items,1 of $28.7 million, or $0.20 per common share, compared with third quarter 2000 operating earnings of $42.3 million, or $0.30 per common share. Fourth quarter 1999 operating earnings were $81.0 million, or $0.55 per common share. Aetna's business now consists of health care, including dental, group insurance and related benefits, as well as a large case pensions unit.

Full-year 2000 operating earnings, excluding all other items in the fourth and previous quarters, were $193.6 million, or $1.35 per common share. This compares with $327.8 million, or $2.05 per common share, for 1999.

"The fourth quarter marked the end of a year of significant change for Aetna," said William H. Donaldson, Chairman of Aetna. "In 2000, we embarked on a course of action to return value to shareholders and restore Aetna to its leadership position. We completed the sale of Aetna Financial Services and Aetna International to ING, and spun off new Aetna to shareholders. As a result, we provided total shareholder value of $10.9 billion, combining our market capitalization at year-end and the cash proceeds paid to shareholders as part of the ING transaction.

"We also began the process of building the new Aetna, restructuring our health business around the key themes of choice, flexibility, quality and responsiveness, and improving our competitiveness with a series of strategic initiatives. All the while, we have charted a course for change that ultimately should lead to a profound transformation in the way we do business. Our transition is on track, and the new Aetna has been born. We look forward to demonstrating a heightened ability to better serve our customers, improve financial results and fulfill our mission as an industry leader in 2001 and beyond," Donaldson said.

As a result of charges totaling $381.9 million, the company, as expected, recorded a fourth-quarter operating loss of $353.2 million, or $2.49 per share. These charges relate to the write-off of goodwill mostly associated with Medicare market exits, restructuring actions announced in December and change-in-control costs related to the ING transaction.

"Our efforts to improve our business are well under way, and we are making considerable progress on our strategic initiatives," said Aetna President and CEO John W. Rowe, M.D. "We are eliminating targeted unprofitable membership, most notably in Medicare. We are proceeding with plans to reduce expenses accordingly, eliminate duplicate staff functions, and improve the efficiency of claim and member service processes. The redesign of our sales force to increase its effectiveness and place greater emphasis on high-potential middle-market business should enhance our sales results. We also continue to focus on the fundamentals of pricing and effective medical cost management.

"Our announcement of a new nationwide policy of flexible physician contracting and policy changes in several states, most recently California, represents a leap forward in our efforts to improve relationships with physicians and hospitals. These steps, combined with our efforts to redesign our company around serving the individual member, should set the stage for Aetna to evolve as a leader in the next generation of health care," Dr. Rowe said.

Health Results
Aetna's health care business, which provides a full range of managed care, indemnity, dental and group insurance products and services, reported operating earnings, excluding other items, of $60.0 million for the fourth quarter 2000, compared with $118.1 million in the fourth quarter of 1999. The decline in operating earnings from the prior-year period reflects significantly higher medical costs for both the Commercial and Medicare HMO products, which exceeded higher per-member premiums.

The fourth quarter 2000 Commercial HMO medical cost ratio (MCR) was 87.2 percent, which was significantly higher than in the fourth quarter of 1999, but slightly improved over the third quarter 2000, mainly due to improving premium yields. Commercial HMO medical costs for services in the quarter were approximately 12 percent higher than in the fourth quarter of 1999.

The Medicare HMO medical cost ratio was 97.5 percent in the quarter, significantly higher than in the prior-year period, but only slightly higher than the third quarter of 2000, when adjusting for the one-time impact of provider contract terminations or resolutions that occurred in the third quarter of 2000. The company exited selected Medicare markets as of January 1, 2001, affecting approximately 260,000 members, or 47 percent of current Medicare HMO membership. In the fourth quarter of 2000, these markets had a combined MCR of approximately 104 percent. The remaining markets, in which Aetna will continue to offer Medicare HMO products in 2001, reported a fourth quarter 2000 MCR of approximately 91 percent.

Total health membership stood at 19.3 million as of December 31, 2000, a 6 percent decline during the year. Health membership increased by 81,000 from the third quarter 2000, but is expected to decline overall in 2001 due to largely planned PHC attrition, and Medicare HMO and Commercial HMO product market exits. The Aetna Commercial HMO risk business grew by 8 percent during the year, an increase that was more than offset by largely planned PHC attrition. Dental membership stood at 14.3 million as of December 31, 2000, making Aetna one of the largest dental benefits providers in the U.S.

Total SG&A expenses for the fourth quarter 2000 were lower than the prior-year period, excluding the impact of severance and the change-in-control related costs. Comparable expenses increased slightly from the third quarter of 2000 due to normal seasonally higher advertising and enrollment costs.

Group Insurance and Other Health operating earnings were slightly lower than the fourth quarter of 1999 and 8 percent lower sequentially. The decline from the third quarter 2000 mostly reflects lower investment income. Total Group Insurance membership was 11.7 million as of December 31, 2000, higher than in the third quarter of 2000, but lower from the year-ago period, primarily due to some membership lapses in the Disability line.

Aetna's total network grew 8 percent during the year, as nearly 20,000 additional physicians chose to contract with Aetna. The network was composed of approximately 467,000 primary care physicians, specialists, dentists and other health care professionals, including hospitals and pharmacies as of December 31, 2000. The HMO network grew to over 345,000, or up 13 percent since the beginning of the year. The retail pharmacy network now stands at nearly 50,000 participating pharmacies, one of the largest networks in the industry.

Large Case Pensions, which manages a variety of discontinued and other retirement and savings products for defined benefit and defined contribution plan customers, reported $15.3 million in operating earnings for the fourth quarter 2000. Operating earnings were lower than the prior year mainly due to lower investment income, as capital was redeployed to other Aetna businesses during the year and underlying liabilities continued to decline, in keeping with the run-off nature of the business.

Corporate expenses were $46.6 million in the fourth quarter 2000, compared with $57.3 million in the fourth quarter of 1999. Expenses declined due to lower interest expenses from reduced debt levels as a result of the ING transaction, in addition to ongoing cost-reduction initiatives.

Income from Discontinued Operations, which comprises those businesses sold to ING, reported operating earnings of $139.7 million for the fourth quarter, compared with $83.6 million in fourth quarter 1999. Including an after-tax charge of $174.0 million, mainly due to ING sale-related transaction costs, discontinued operations showed a loss of $34.3 million for the fourth quarter of 2000.

Total Revenues were $6.6 billion for the fourth quarter 2000, compared with $6.7 billion for the fourth quarter of 1999. The decline in total revenues primarily reflects the lower health membership levels in the PHC business, partially offset by higher per-member premiums. Total revenues for 2000 were $26.8 billion, up from $22.1 billion in 1999.

Net Income/Loss. Including discontinued operations, Aetna reported a net loss of $406.3 million, or $2.87 per common share, for the fourth quarter 2000. This reflects a loss of $372.0 million, or $2.63 per common share, from continuing operations as a result of the previously discussed charges and the loss of $34.3 million from discontinued operations. The net loss compares with net income of $134.4 million, or $0.92 per common share, for the fourth quarter 1999.

2000 Net Income/Loss
The loss from continuing operations for 2000 was $127.4 million, or a loss of $0.90 per common share. This compares to 1999 income of $399.4 million, or $2.54 per common share.

Including discontinued operations, net income for 2000 was $127.1 million, or $0.90 per common share. Net income for 2000 also includes a $94.9 million reduction of discontinued products reserves in the Large Case Pensions segment, as well as the previously mentioned fourth quarter and other charges and net realized capital gains or losses. Net income in 1999 was $716.5 million, or $4.72 per common share, which includes a $50.2 million reduction of discontinued products reserves in the Large Case Pensions segment.

2001 Dividend Policy. As announced in December, Aetna intends to pay a $0.04 dividend per common share annually, rather than quarterly. The dividend is expected to be paid in the fourth quarter of each year, beginning in 2001.

Aetna is the nation's leading provider of health care and related benefits, serving more than 19 million health care members, 14 million dental members and 11 million group insurance customers. Information about Aetna is available at

The public can access the Aetna fourth quarter 2000 conference call today at 9 a.m. EST by dialing 212-896-6006 or through the Internet at

1All results that follow relate to continuing operations, unless otherwise noted. All per-share amounts are on a diluted basis, unless otherwise noted (see p. 8). Operating earnings exclude net realized capital gains or losses. Charges and other items in the fourth quarter 2000 include: a $238.3 million after-tax charge related to the write-off of goodwill primarily associated with the company's exiting of certain Medicare markets; a $92.6 million after-tax severance charge related to the strategic actions announced in December; and $51.0 million after-tax costs, including approximately $38 million change-in-control related costs and $13 million in severance actions in the fourth quarter that occurred prior to the announced severance charge. The change-in-control costs resulted from the spin-off of Aetna to shareholders on December 13, 2000 as part of the transaction with ING Groep N.V.

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CAUTIONARY STATEMENT --Certain information in this press release is forward looking, including statements regarding the strategic initiatives designed to improve competitiveness, costs, pricing and financial results (including those regarding: eliminating targeted unprofitable membership and related expense reductions; improving efficiency of claim and member service processes; redesign of the sales force; and elimination of duplicate staff functions). Forward-looking information is based on management's estimates, assumptions and projections, and is subject to significant uncertainties and other factors, many of which are beyond the control of the company. Important risk factors that could cause Aetna's actual future results to differ materially from forward-looking statements include, among other things, unanticipated increases in medical costs (including increased medical utilization, increased pharmacy costs, increases resulting from unfavorable changes in contracting or recontracting with providers, changes in membership mix to lower premium or higher-cost products or membership adverse selection); the availability of management and other appropriately qualified personnel; the ability to maintain targeted levels of service, and improve relations with providers as well as operating performance, while making significant staff reductions and taking actions to reduce medical costs; the ability to successfully integrate the Prudential HealthCare transaction on a timely basis and in a cost-efficient manner (which also is affected by the ability to retain targeted membership, eliminate duplicative administrative functions and integrate management information systems); adverse government regulation (including legislative proposals to eliminate or reduce ERISA pre-emption of state laws that would increase potential litigation exposure, other proposals that would increase potential litigation exposure or proposals that would mandate coverage of certain health benefits); adverse pricing actions by government payors; changes in size and product mix of membership in key markets; and the outcome of litigation and other regulatory matters, including numerous purported health care class actions and ongoing reviews of business practices by various regulatory agencies. For more discussion of important factors that may materially affect Aetna, please see the risk factors contained in Aetna's Form 10 information statement, on file with the Securities and Exchange Commission. You also should read the information statement for a discussion of Aetna's historical results of operations and financial condition.

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