Aetna Reports Third Quarter 2002 Results

Earnings of $0.73/share before prior-period favorable developments
Net income of $98.8 million vs. loss of $(54.4) million year ago

HARTFORD, Conn., October 31, 2002 — Aetna (NYSE: ΑET) today announced third quarter 2002 operating earnings, excluding other items¹, of $151.5 million, or $0.98 per share. These results include approximately $113 million, or $0.73 per share for the quarter, and approximately $38 million, or $0.25 per share, of favorable development of prior-period medical cost estimates, as well as the favorable resolution of prior-period contract matters for a large customer. Aetna reported net income of $98.8 million, or $0.64 per share.

"These results clearly demonstrate the momentum of our turnaround," Chairman and CEO John W. Rowe, M.D., said. "We have reduced our medical cost trend and medical cost ratio, increased our net premium yield and improved our operating margins. Looking forward, we can now focus on taking the next steps that will help us achieve our 2003 goals and build on the competitive strengths that will enhance Aetna's position as a leader in the marketplace."

"We are very encouraged by our third-quarter results," President Ronald A. Williams said. "We will continue taking the steps necessary to further reduce medical cost trends to competitive levels, while offering innovative products, expanding our distribution capabilities and maintaining our focus on delivering superior customer service."


Quarterly Financial Results at a glance
	Three Months Ended
	Sept 30 2002	Sept 30 2001	June 30 2002

Revenues	$4.8 billion	$6.2 billion	$5.1 billion
Operating earnings (loss) excluding other items¹	$151.5 million*	$(49.3) million	$91.3 million**
Per share operating earnings (loss) excluding other items¹	$0.98*	$(0.34)	$0.59**
Net income¹(loss)	$98.8 million*	$(54.4) million	$108.2 million**
* Includes approximately $17 million, or $0.11 per share, of favorable development of prior-period medical cost estimates and approximately $21 million, or $0.14 per share, related to the favorable resolution of prior-period contract matters for a large customer. **Includes approximately $42 million, or $0.27 per share, of favorable development of prior-period medical cost estimates.


FAS No. 142 Pro Forma Basis
Financial Accounting Standard No. 142, "Goodwill and Other Intangibles," was implemented on January 1, 2002. This standard requires the elimination of goodwill and certain types of intangible asset amortization on a prospective basis. Accordingly, operating earnings for 2002 do not include amortization of goodwill. The following supplemental table provides operating results for the 2001 period on a comparable basis to that of 2002:
	Three Months Ended
	Sept 30 2002	Sept 30 2001	June 30 2002

Operating earnings excluding other items¹	$151.5 million	$0.9 million	$91.3 million
Per share operating earnings excluding other items¹	$0.98	$0.01	$0.59
Net income¹(loss)	$98.8 million	$(4.2) million	$108.2 million

Health Care business results

Health Care, which provides a full range of insured and self-insured health care and dental products and services, reported:

Operating earnings, excluding other items, of $127.9 million for the third quarter 2002, compared with a third quarter 2001 loss of $(22.5) million and second quarter 2002 earnings of $68.3 million. Third quarter 2002 health care operating earnings include approximately $17 million of favorable development of prior-period medical cost estimates and approximately $21 million related to the favorable resolution of prior-period contract matters for a large customer. Second quarter 2002 health care operating earnings included approximately $42 million of favorable development of prior-period medical cost estimates.
Improved margin results, driven by an increase in the premium yield and a continuation of the previously noted decline in the medical cost trend, combined with continued reductions in operating costs and a decrease in amortization of intangibles.
A commercial HMO medical cost ratio (MCR) of 81.4 percent for the third quarter 2002, compared with 90.1 percent for the third quarter 2001 and 84.1 percent for the second quarter 2002. Excluding the favorable prior-period developments noted above, the MCR was 83.0 percent for the third quarter 2002 and 86.1 percent for the second quarter 2002.
A Medicare HMO medical cost ratio of 79.3 percent for the third quarter 2002, compared with 92.9 percent for the third quarter 2001 and 82.8 percent for the second quarter 2002. Excluding the favorable prior-period developments noted above, the Medicare MCR was 84.2 percent for the third quarter 2002 and 86.8 percent for the second quarter 2002.
A decrease in health care operating expenses of approximately $70 million from the third quarter 2001, primarily resulting from ongoing expense-reduction initiatives.
Total medical membership of approximately 13.95 million at September 30, 2002, a decrease of approximately 500,000 from June 30, 2002.

Group Insurance business results

Group Insurance, which includes Group Life, Disability and Long-Term Care products, reported:

Operating earnings, excluding other items, of $38.2 million for the third quarter 2002, compared with $41.0 million in the third quarter 2001 and $36.3 million in the second quarter 2002. Results were lower than third quarter 2001, primarily reflecting increased operating expense levels. Results were higher than second quarter 2002, primarily reflecting a lower overall benefit cost ratio.
Revenues for the third quarter 2002 of $440.3 million, compared with $421.9 million in the third quarter of 2001 and $438.8 million in the second quarter of 2002.

Large Case Pensions business results

Large Case Pensions, which manages a variety of discontinued and other retirement and savings products for defined benefit and defined contribution plan customers, reported:

Operating earnings of $3.9 million for the third quarter 2002, compared with $7.1 million for the third quarter 2001 and $6.9 million, excluding an other item, for the second quarter 2002. The year-over-year decrease was primarily the result of lower investment income, as well as the continued decline in underlying liabilities and related assets in keeping with the run-off nature of the business. The sequential decrease was driven primarily by lower investment income in the continuing book of business.

Total company results

Total Revenues. Revenues were $4.8 billion for the third quarter 2002, compared with $6.2 billion for the third quarter 2001 and $5.1 billion for the second quarter 2002. The decrease primarily was the result of lower health membership, partially offset by higher per-member premiums.
Total Operating Expenses. Pretax operating expenses were $1.05 billion for the third quarter 2002, compared with $1.12 billion for the third quarter 2001 and $1.06 billion for the second quarter 2002. Operating expenses for the third quarter 2002 do not include the previously announced severance and facilities charge of $57.9 million after tax.
Corporate Interest expense was $18.5 million after tax for the third quarter 2002, compared with $24.7 million for the third quarter 2001 and $20.2 million for the second quarter 2002.
Net Income/Loss. Aetna reported net income of $98.8 million for the third quarter 2002, compared with a net loss of $(54.4) million for the third quarter 2001 and net income of $108.2 million for the second quarter of 2002. Net income also includes net realized capital gains of $5.2 million for the third quarter 2002.

The public can access the third-quarter conference call today at 8:30 a.m. EST by dialing 800-289-0730, or for international callers, 913-981-5509. At that time, Aetna will update its 2002 earnings outlook. A live audio Webcast and replays will be available through Aetna's Investor Information link on the Internet at www.aetna.com. A transcript of the call will be available at 3 p.m. today on www.aetna.com.

Aetna is one of the nation's leading providers of health care and related group benefits, serving approximately 13.9 million medical members, 11.9 million dental members and 11.7 million group insurance customers, as of September 30, 2002. The company has expansive nationwide networks of more than 539,000 health care services providers, including over 327,000 primary care and specialist physicians and 3,300 hospitals. For more information about Aetna, please visit the company's website at www.aetna.com.

¹All operating results exclude other items and net realized capital gains, in order to provide a comparison that the company believes better reflects its underlying business performance. Set forth below is an itemization of other items excluded from operating results and a reconciliation of operating results to net income (loss) under generally accepted accounting principles for each period shown (all amounts presented are net of tax):


Three Months Ended:
Sept 30 2002	Sept 30 2001	June 30 2002

Operating earnings (loss) from continuing operations before other items	$	151.5	$	(49.3)	$	91.3
Other items:
Health Care Segment:
Severance and facilities charge		(55.6)		-		(17.5)
Favorable reserve developments related to Medicare markets exited January 1, 2001		-		1.9		-
Group Insurance Segment:
Severance and facilities charge		(2.3)		-		-
Events of September 11, 2001		-		(9.0)		-
Large Case Pensions Segment:
Reduction of reserve for anticipated future losses on discontinued products		-		-		5.4
Net realized capital gains		5.2		2.0		29.0
Net income (loss)	$	98.8	$	(54.4)	$	108.2

ADDITIONAL INFORMATION; CAUTIONARY STATEMENT -- Certain information in this press release is forward looking, including the statements regarding the turnaround, medical cost trends, products, distribution and customer service and the company's 2003 financial and business goals. 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: 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); continued decreases in membership levels; increases in medical costs or Group Insurance claims resulting from any future threats of terrorism; the ability to achieve targeted savings from work force reductions and to otherwise reduce administrative expenses in light of significant membership reductions being experienced; 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 implement Aetna's new operating model; lower levels of investment income from continued lower interest rates; adverse government regulation (including legislative proposals to eliminate or reduce ERISA pre-emption of state laws that would increase potential litigation exposure, and other proposals, such as the Patients' Bill of Rights, that would increase potential litigation exposure or mandate coverage of certain health benefits); adverse pricing actions by government payors; changes in size, product mix and medical cost experience of membership in key markets, particularly given the significant membership reductions being experienced; and the outcome of litigation and regulatory matters, including numerous 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 2001 Report on Form 10-K, on file with the Securities and Exchange Commission. You also should read Aetna's 2001 Form 10-K and 2002 third quarter Form 10-Q when filed with the Securities and Exchange Commission for a discussion of Aetna's historical results of operations and financial condition.

Related Links:

3Q02 Financial Supplement
(PDF: 71 KB / 11 pages)

3Q02 Earnings Tables
(PDF: 159 KB / 5 pages)