Aetna Reports Fourth Quarter and Year-end 2001 Results

Hartford, Conn., February 21, 2002 — Aetna (NYSE: ΑET) today announced a fourth quarter 2001 operating loss, excluding other items1, of $84.6 million ($0.59 per share), compared with fourth quarter 2000 operating earnings, excluding other items, of $28.7 million ($0.20 per share) and a third quarter 2001 operating loss of $49.3 million ($0.34 per share). The commercial HMO medical cost ratio (MCR) in fourth quarter 2001 was 89.7 percent, an improvement over the third quarter MCR of 90.1 percent, as sequential premium rate increases outpaced medical cost increases for the second- consecutive quarter.

Full-year 2001 results, excluding other items, showed an operating loss of $266.4 million ($1.86 per share), compared with full-year 2000 operating earnings, excluding other items, of $193.6 million ($1.35 per share).

"In the past year, we have strengthened our management, remodeled the leadership structure, established a new strategic direction, and implemented significant cost-reduction programs," Chairman, President and CEO John W. Rowe, M.D., said. "We also created a more favorable capital structure by lengthening the term of our debt, thereby strengthening our balance sheet.

"We recognized that the first step to return to profitability was to eliminate unprofitable business. As we looked to 2002, two of our fundamental goals were to improve our pricing and to restructure our membership, including the elimination of unprofitable products, programs and markets, particularly in our fully insured membership.

"We believe this focus on profitability over growth has been successful," Dr. Rowe said. "We have a smaller book of business with a more favorable economic outlook. We now enter 2002 positioned for profitability.

"In addition, our efforts to improve customer service have shown results. For example, our Houston-area HMO recently was ranked highest in overall member satisfaction by J.D. Power and Associates. And Aetna was ranked the number one HMO plan in New Jersey in 2001.

"Looking forward, our new customer segment-focused strategy will position us to more effectively identify profitable customers and serve members' needs, while offering greater product choice such as Aetna's new HealthFund.

"We also announced in December a plan to further reduce Aetna's work force by approximately 6,000, as we align our resources, while continuing to meet the needs of our current level of membership. Accordingly, we reported a $125.1 million after-tax severance and facilities charge in the fourth quarter 2001 for actions that will occur primarily in 2002.

"Other areas of the company, including Group Insurance, Large Case Pensions, investments and our administrative services health care business, provided positive results again this quarter. In Group Insurance, an emphasis on retaining profitable customers resulted in very competitive margins again this year. In addition, increased premiums in our Long-Term Care product support our expectations for continued growth in this developing market," Dr. Rowe said.

Health Care, which provides a full range of insured and self-insured health care, indemnity, and dental products and services, reported an operating loss, before goodwill amortization and other items2, of $16.1 million for the fourth quarter 2001, compared with operating earnings, excluding other items, of $89.8 million in the fourth quarter of 2000. Fourth quarter 2001 results included two substantially off-setting items: $13.0 million after-tax income from the settlement of a prior-period risk-sharing arrangement and $15.3 million of after-tax health care costs associated with prior-period claim surcharges. The decline in operating earnings from fourth quarter 2000 reflects per-member medical costs outpacing premium increases, lower net investment income and lower fees, partially offset by lower operating expenses.

On a sequential basis, the fourth quarter operating loss reflected a decline from third quarter 2001 operating earnings, excluding other items, of $10.2 million. Third quarter results also included a $13.1 million after-tax benefit from the sale of Aetna's New Jersey Medicaid membership. The fourth quarter decline from the third quarter reflects lower results for both health risk and administrative services businesses primarily because of seasonally higher operating expenses, the absence of the benefit associated with the third quarter New Jersey Medicaid membership sale, lower fees and lower net investment income. The decline was partially offset by per-member premium increases outpacing increases in sequential medical costs for the commercial HMO product.

Full-year 2001 results for Health Care show an operating loss, excluding other items, of $365.3 million, compared with operating earnings, excluding other items, of $95.5 million for full-year 2000, reflecting lower results for the health risk business, primarily because of significant per-member medical cost increases outpacing premium increases, as well as lower results for the administrative services business.

The fourth quarter 2001 Commercial HMO medical cost ratio (MCR) was 89.7 percent, compared with third quarter 2001 MCR of 90.1 percent and fourth quarter 2000 MCR of 87.2 percent. The sequential improvement in MCR was primarily the result of per-member premium rate increases outpacing medical costs. For continuing Medicare markets, the fourth quarter 2001 Medicare HMO MCR was 92.9 percent, level with the third quarter 2001 MCR for those markets and higher than the fourth quarter 2000 Medicare MCR for those markets of 91.8 percent.

Total health membership stood at 17.2 million as of December 31, 2001, a decrease of approximately 348,000 members from third quarter 2001 and 2.2 million from year-end 2000, primarily reflecting targeted reductions in commercial HMO membership, as well as targeted Medicare and Medicaid withdrawals. Health membership in January 2002 will reflect a significant decline from December 31, 2001 levels, as well as an increase in the proportion of self-insured membership. Dental membership stood at approximately 13.5 million, 223,000 members lower than third quarter 2001 and a decline of 792,000 members from year-end 2000.

Group Insurance, which includes Group Life, Disability and Long-Term Care products, reported $36.3 million in operating earnings for fourth quarter 2001, compared with $47.1 million for fourth quarter 2000. The decline over the prior-year quarter was due primarily to lower net investment income and higher operating expenses. Group Insurance membership stood at approximately 11.5 million, a decline of approximately 204,000 members from December 31, 2000 levels. For full-year 2001, Group Insurance reported operating earnings, excluding other items, of $160.1 million, in line with prior guidance, compared with $193.4 million in 2000. The decline was primarily the result of less favorable disability experience, lower net investment income and higher expenses, offset in part by improved Long-Term Care experience and a lower effective tax rate.

Large Case Pensions, which manages a variety of discontinued and other retirement and savings products for defined benefit and defined contribution plan customers, reported $3.8 million in operating earnings for the fourth quarter 2001, compared with $15.3 million in the fourth quarter of 2000. For full-year 2001, Large Case Pensions reported operating earnings, excluding other items, of $31.6 million, compared with $66.0 million in 2000. Operating earnings were lower than the prior-year quarter and full year mainly due to lower investment income, consistent with the continued decline in underlying liabilities and related assets, in keeping with the run-off nature of the business.

Corporate Interest expense was $26.6 million in the fourth quarter of 2001, compared with $37.0 million in the fourth quarter 2000. For full-year 2001, corporate interest was $92.8 million, compared with $161.3 million in 2000. Corporate interest expenses declined over the prior-year quarter and full year due to lower levels of debt resulting from the Aetna/ING transaction in December 2000 and lower short-term interest rates.

Total Revenues. Revenues were $6.0 billion in the fourth quarter of 2001, compared with $6.6 billion in fourth quarter of 2000. For full-year 2001, total revenues were $25.2 billion, compared with $26.8 billion in 2000. The decline in total revenues over the prior-year quarter and full year primarily reflects lower health membership, partially offset by higher per-member premiums.

Fourth Quarter Net Income/Loss. Aetna reported a net loss of $187.6 million ($1.30 per share) in the fourth quarter of 2001, compared with a net loss of $406.3 million ($2.87 per share) in fourth quarter of 2000. After tax, net realized capital gains were $9.6 million in fourth quarter of 2001, compared with an after-tax loss of $18.8 million in the fourth quarter of 2000. Net income/loss includes income from discontinued operations of $11.4 million for the fourth quarter 2001 and a loss from discontinued operations of $34.3 million in the fourth quarter 2000.

Full-Year 2001 Net Income/Loss. The net loss for 2001 was $279.6 million, or a loss of $1.95 per share, compared with net income of $127.1 million, or $.90 per share, for 2000. Net income/loss includes income from discontinued operations of $11.4 million for 2001 and $254.5 million for 2000. Net income for 2001 includes $61.4 million of reductions to the discontinued products reserves in the Large Case Pensions segment, compared with $94.9 million in 2000.

Goodwill Impairment. The company also announced that, in connection with its adoption of the new Financial Accounting Standards Board rules for goodwill and other acquired intangible assets, it anticipates recording a noncash impairment of goodwill in the first quarter of 2002 of approximately $3.0 billion as a cumulative effect of a change in accounting principle, which will affect net income, but not operating income. Under the new rule, any subsequent impairments would be classified as an operating expense.

Aetna is one of the nation's leading providers of health care and related group benefits, serving 17.2 million health care members, 13.5 million dental members and 11.5 million group insurance customers, as of December 31, 2001. Information about Aetna is available at www.aetna.com.

The public can access the fourth quarter and full-year 2001 Aetna conference call today at 9 a.m. EST by dialing 888-849-9218. At that time, Aetna will give 2002 earnings guidance for its Group Insurance and Large Case Pensions businesses; estimated investment income and interest expense for the full year 2002; and the amount of the goodwill impairment pursuant to FAS 142. The company also will provide 2002 information about the Health Care business, including but not limited to the following: estimated January and projected year-end membership, January commercial HMO premium yield, the 2001 MCR profile of the January book of risk business, and January and projected year-end risk/ASC mix. 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.

1 All operating results exclude discontinued operations, net realized capital gains and losses, cumulative effect adjustment and other items, 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 loss from continuing operations under generally accepted accounting principles for each period shown:

Three Months Ended: Twelve Months Ended:
December 31
2001
September 30
2001
December 31
2000
December 31
2001
December 31
2000
Operating earnings (losses) from continuing operations before other items and cumulative effect adjustment $ (84.6) $ (49.3) $ 28.7 $ (266.4) $ 193.6

Other items excluded, net of tax:
                   
Health Care Segment:                    
Favorable (unfavorable) reserve developments related to Medicare markets exited January 1, 2001   1.1   1.9     (26.0)  
Severance and facilities charges   (125.1)     (92.6)   (125.1)   (92.6)
Goodwill write-off primarily related to certain Medicare markets exited January 1, 2001       (238.3)     (238.3)
Other costs (including approximately $37.7 million change-in-control related costs and $13.0 million in severance actions in the fourth quarter of 2000 that occurred prior to the announced severance charge)       (50.7)     (50.7)
Shareholder litigation settlement agreement           (5.2)
Assessment - New Jersey HMO Insolvency Fund           (14.6)
Group Insurance Segment:                    
Events of September 11, 2001     (9.0)     (9.0)  
Other change-in-control related costs       (0.3)     (0.3)
Large Case Pensions Segment:                    
Reduction of reserve for loss on discontinued products         61.4   94.9
Net realized capital gains (losses)     9.6     2.0     (18.8)     73.6     (14.2)
Loss from continuing operations before cumulative effect adjustment   (199.0)   (54.4)   (372.0)   (291.5)   (127.4)
Cumulative effect adjustment, net of tax         0.5  
Loss from continuing operations $ (199.0) $ (54.4) $ (372.0) $ (291.0) $ (127.4)
2 Including goodwill amortization, the Health Care operating loss was $98.1 million for the fourth quarter 2001, income of $3.3 million for fourth quarter 2000 and loss of $(72.7) million for third quarter 2001.

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CAUTIONARY STATEMENT - Certain information in this press release is forward looking, including, without limitation, the statements regarding projections about the company's future performance and expected membership. 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); increases in medical costs or Group Insurance claims resulting from the aftermath of the events of September 11, 2001 and the continued threat 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 in 2002; 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 customer model approach; the ability to successfully complete the integration of 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); 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 in 2002; 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 and 2001 third quarter Form 10-Q, on file with the Securities and Exchange Commission. You also should read Aetna's 2001 Form 10-K when filed with the Securities and Exchange Commission for a discussion of Aetna's historical results of operations and financial condition, and further discussion of risk factors.

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




Related Links:

4Q01 Financial Supplement
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4Q01 Financial Supplement

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4Q01 Earnings Tables





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