Aetna Reports First Quarter Operating Results

HARTFORD, Conn., May 10, 2001 — Aetna (NYSE: ΑET) announced today a first quarter 2001 operating loss, excluding an other item, of $36.6 million, or $0.26 per share, compared with first quarter 2000 operating earnings from continuing operations of $86.2 million, or $0.61 per share. The other item represents $34.3 million after tax of prior-period medical costs recorded in the first quarter 2001 related to Medicare markets the company exited effective January 1, 2001.1

Cash earnings for the first quarter, defined as operating earnings or losses plus goodwill and intangibles amortization, were $0.34 per share, compared with $1.23 per share for the prior-year quarter.

"We are disappointed with these results, which were caused by higher-than-expected medical costs related primarily to the fourth quarter of 2000 and the first quarter of 2001," Aetna Chairman and CEO Dr. John W. Rowe said. "At the same time, we are pleased that other aspects of our business performed well. Group Insurance and Large Case Pensions made strong contributions to results; health membership is higher than expected, particularly in our Administrative Services Only business; interest expenses are lower; and investment income is higher.

1 Including the other item, the operating loss was $70.9 million, or $0.49 per share. Operating results also exclude capital gains and/or losses.

"The recent increases in our medical cost trend result primarily from higher utilization, driven by outpatient services, pharmacy and specialist services, although higher unit costs also contributed. Our analysis of the causes is continuing.

"The set of general actions to improve our financial performance implemented earlier this year - including administrative cost reductions, market exits, increased pricing and new product initiatives - were appropriate and necessary. But they have not proven to be sufficient and must be supplemented by specific actions to improve our underlying business operations," Dr. Rowe said.

"These include improvements in our management information tools, underwriting, pricing, contracting, benefit and plan design, and network and patient management programs.

"The problems in our core health business are substantial. They are not something we can fix in a quarter or two. These results reflect where Aetna has been, not where it is going," Dr. Rowe said.

"We do have important strengths on which to build, including a significant market position, an experienced and professional work force that is anxious to change and determined to succeed, and a new management team of seasoned leaders who are focused on winning by meeting the needs of our customers," Dr. Rowe said.

"We believe that the changes we are beginning to introduce will yield improved financial performance through 2002 and substantially improved performance through 2003.

"We are building the foundation for many changes now, and they will be implemented throughout this year and next, and in 2003. We believe the successful implementation of these changes will result in continuing improvement in our financial performance, which by the end of 2003 will be comparable to that of other major national health insurers," Dr. Rowe said.

Health Care, which provides a full range of managed health care, indemnity and dental products and services, reported operating earnings of $13.7 million before goodwill amortization and the other item in the first quarter of 2001, compared with operating earnings of $156.6 million in the first quarter of 2000. The decline in results from the prior-year period primarily reflects significantly higher per-member medical costs for Commercial and Medicare HMO risk products, which exceeded higher per-member premiums. In addition, the company's health risk business reflects lower indemnity and PPO results due primarily to higher claim costs related to several large customers.

The first quarter 2001 Commercial HMO medical cost ratio (MCR) was 90.0 percent, compared to the first quarter 2000 MCR of 83.8 percent and the fourth quarter 2000 MCR of 87.2 percent, both as previously reported. These increases were due principally to an increase in utilization of health care services for first quarter dates of service, as well as prior-period medical costs of approximately $22.5 million, after tax.

For continuing markets, the first quarter 2001 Medicare HMO medical cost ratio was 93.7 percent, compared with the first quarter 2000 MCR of 90.0 percent and the fourth quarter 2000 MCR of 91.8 percent, as higher medical costs outpaced premium increases.

Total health membership as of March 31, 2001, was 18.3 million, a decrease of approximately 1.0 million from year-end 2000, primarily reflecting expected losses of risk membership. Dental membership stood at approximately 14.2 million on March 31, 2001.

Group Insurance, which provides group life, disability and long-term care products, reported $45.2 million in operating earnings for the first quarter 2001, compared with $46.2 million for the prior-year quarter. The decline is primarily the result of higher incurred disability claims and operating expenses, offset in part by higher investment income and more favorable life experience. Group Insurance membership stood at 11.5 million as of March 31, 2001.

Large Case Pensions, which manages a variety of discontinued and other retirement and savings products for defined benefit and defined contribution plan customers, reported $10.6 million in operating earnings for the first quarter 2001, compared to $16.6 million for the first quarter of 2000. Operating earnings were lower than the prior-year quarter mainly due to lower investment income, as capital was redeployed to other Aetna businesses and underlying liabilities continued to decline, in keeping with the run-off nature of the business.

Corporate interest expense was $19.7 million in the first quarter of 2001, compared with $44.8 million in the first quarter of 2000. Interest expense declined due to reduced debt levels as a result of the Aetna/ING transaction in December 2000 and favorable market conditions.

Total Revenues were $6.4 billion for the first quarter 2001, compared with $6.8 billion from continuing operations for the first quarter of 2000. The decline in total revenues primarily reflects lower health membership, partially offset by higher per-member premiums.

Net Income/Loss. Aetna reported a net loss of $48.2 million or a loss of $0.34 per share for the first quarter of 2001, compared to income from continuing operations of $75.4 million, or $0.53 per share, in the first quarter of 2000. Capital gains were $22.2 million in the first quarter 2001, compared with capital losses of $10.8 million in the first quarter of 2000.

Aetna is the nation's leading provider of health care and group benefits, serving 18.3 million health care members, 14.2 million dental members and 11.5 million group insurance customers. Information about Aetna is available at www.aetna.com.

The public can access the Aetna first quarter 2001 conference call today at 9 a.m. EST by dialing 212-896-6014. A live audio Webcast and replays will be available through Aetna's Investor Information link on the Internet at www.aetna.com.

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CAUTIONARY STATEMENT - Certain information in this press release is forward looking, including, without limitation, the statements regarding future financial performance. 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 Aetna's control. Important risk factors could cause actual future results and other future events to differ materially from those currently estimated by management. Those risk factors include, but are not limited to: continued or further 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; as well as changes in medical cost estimates due to the necessary extensive judgment that is used in the medical cost estimation process, the considerable variability inherent in such estimates and the sensitivity of such estimates to changes in medical claims payment patterns and changes in medical cost trends); 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 governent payors; changes in size and product mix of membership in key markets; and the outcome of litigation and 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 2000 Report on Form 10-K, on file with the Securities and Exchange Commission. You also should read Aetna's Form 10-K and Aetna's Form 10-Q for the 2001 first quarter for a discussion of Aetna's historical results of operations and financial condition.

For more information about Aetna Inc., please visit the company's website at www.aetna.com.


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