Aetna Reports First-Quarter 2005 Results

HARTFORD, Conn., April 28, 2005 — Aetna (NYSE: AET) today announced first-quarter operating earnings of $1.38 per share. Operating earnings, excluding favorable reserve development, were $1.10 per share. Favorable reserve development was $84 million after tax, or $0.28 per share, of which $34 million, or $0.11 per share, resulted from the previously announced reserve release associated with the New York State Market Stabilization Pool. The increase in operating earnings primarily reflects growth in revenues from higher membership levels and continued strong underwriting results, as well as continued general and administrative expense efficiencies. Operating earnings exclude net realized capital gains and losses.1

"These excellent results reflect the solid execution of our profitable growth strategy and demonstrate our strong momentum in the marketplace," said John W. Rowe, M.D., chairman and CEO. "Aetna's integrated approach to health care, which includes comprehensive product and service solutions, is increasingly being valued by both plan sponsors and members, who are seeing demonstrated results in medical costs and quality.
Quarterly Financial Results at a Glance

Three Months Ended
March 31
March 31
Total revenues
$5.4 billion
$4.8 billion

Operating earnings**
$421.1 million $308.8 million 36%
Net income $424.0 million $365.8 million 16%
Per share results:      
Operating earnings** $1.38 $0.96 44%
Favorable development of prior-period health care cost estimates (0.28) (0.08)  
Operating earnings, excluding development** $1.10 $0.88 25%
Income from continuing operations $1.39 $1.02  
Income from discontinued operations*** - -   0.12  
Net income $1.39 $1.14 22%
Weighted average common shares (diluted) 306.0 million 320.8 million (4.6%)
* Prior-period results per common share have been adjusted to reflect the March 11, 2005, two-for-one stock split.

** For a full description of operating earnings and per share operating earnings, please see footnote 1 at end of press release.

*** Income from discontinued operations of $40 million for first quarter 2004 reflects the completion of certain Internal Revenue Services audits associated with businesses previously sold.

"Based on our success in attracting new customers, and the continued strength of our operating fundamentals, we are increasing our guidance for 2005 operating earnings to $4.52 to $4.57 per share from our prior guidance of $4.38 to $4.45 per share. We also are increasing our guidance for membership growth to 1.0 million to 1.075 million from our prior guidance of 950,000 to 1.05 million."2

"Our strategy and business operations are squarely focused on positioning Aetna as a market leader," said Ronald A. Williams, president. "Our continued momentum in the marketplace is reflected in the particularly strong performance of our January 1 National Accounts renewal season for all our products: medical, dental, pharmacy, group life and disability. Key drivers of this growth continue to be leadership in consumer-directed products, where we added 139,000 new members in the first quarter, and our integrated approach to health care, which led to an increase of 215,000 members in our Aexcel performance-based network.

"In addition, Aetna Specialty Pharmacy, the joint venture between Aetna and Priority Healthcare, opened its new 63,000-square-foot specialty pharmacy distribution center in Florida in March. We also announced that our pharmacy management business will open a second prescription drug mail-order facility in Pompano Beach later this year, which will add needed capacity to our existing mail order business."

Health Care business results

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

Group Insurance business results

Group Insurance, which includes group life, disability and long-term care products, reported:

Large Case Pensions business results

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

Total Company results

The public may access the conference call through a live audio webcast available on Aetna's Investor Information link on the Internet at Financial, statistical and other information, including GAAP reconciliations, related to the conference call also will be available on Aetna's Investor Information web site.

The conference call also can be accessed by dialing 800-818-5264, or 913-981-4910 for international callers. The company suggests participants dial in approximately 10 minutes prior to the call. Individuals who dial in will be asked to identify themselves and their affiliations.

A replay of the call may be accessed through Aetna's Investor Information link on the Internet at or by dialing 888-203-1112, or 719-457-0820 for international callers. The replay access code is 1994950. Telephone replays will be available from 11:30 a.m. ET on April 28 until midnight ET on May 5.

As one of the nation's leading providers of health care, dental, pharmacy, group life, disability and long-term care benefits, Aetna puts information and helpful resources to work for its approximately 14.4 million medical members, 12.8 million dental members, 9.0 million pharmacy members and 14.0 million group insurance members to help them make better informed decisions about their health care and protect their finances against health-related risks. Aetna provides easy access to cost-effective health care through a nationwide network of more than 672,000 health care professionals, including approximately 400,000 primary care and specialist doctors and 4,084 hospitals. For more information, please visit (Figures as of March 31, 2005)

1 Operating earnings exclude net realized capital gains and losses from income from continuing operations as discussed below. Although the excluded items may recur, management believes that operating earnings and operating earnings per share provide a useful comparison of its underlying business performance from period to period. Management uses operating earnings to assess business performance and to make decisions regarding its operations and allocation of resources among its businesses. Operating earnings is also the measure reported to the Chief Executive Officer for these purposes. The excluded item is discussed below:
The Company also displays certain metrics (e.g., medical cost ratios, operating earnings, operating earnings per share and pretax operating margins) excluding changes to prior-period health care cost estimates. Each quarter, the Company re-examines previously established health care cost payable estimates based on actual claim submissions and other changes in facts and circumstances. Decreases (increases) in prior periods' estimates represent the effect of favorable (unfavorable) development of prior-period health care cost estimates on current-period results of operations, at each financial statement date. The Company believes excluding changes to prior-period health care cost estimates better reflects the underlying current-period health care costs.

For a reconciliation of these items to financial measures calculated under accounting principles generally accepted in the United States of America (GAAP), refer to the tables on pages 9 to 13 of this release.

2 Projected operating earnings per share for full-year 2005 exclude $2.9 million of net realized capital gains for the three months ended March 31, 2005 and also exclude any future net realized capital gains or losses. The Company is not able to project the amount of future net realized capital gains or losses and cannot therefore reconcile projected 2005 operating earnings to projected income from continuing operations. Projected operating earnings per share for full-year 2005 also exclude approximately $84 million, after tax, of favorable development of prior-period health care cost estimates. The Company believes excluding this reserve development better reflects the underlying current-period health care costs. Projected operating earnings per share reflect the effect of the stock split. Projected operating earnings per share for full year 2005 assume approximately 304 million weighted-average diluted shares.

3 Operating expenses as a percentage of revenue excludes net realized capital gains and losses from total revenue. Net realized capital gains and losses do not directly relate to the underwriting or servicing of products for customers and are not directly related to the core performance of the Company's business operations. For a reconciliation to operating expense as a percentage of revenue calculated under GAAP, refer to the tables on page 13 at the end of this press release.

4 In order to provide useful information regarding profitability of the Company on a basis comparable to others in the industry, without regard to financing decisions, income taxes and amortization of other acquired intangible assets (each of which may vary for reasons not directly related to performance of the underlying business), the Company's pretax operating margin excludes interest expense, income taxes and amortization of other acquired intangible assets. Management also uses pretax operating margin to assess its performance, including performance vs. competitors. Operating earnings used in the pretax margin calculation also exclude the items noted in footnote 1. For a reconciliation to margin calculated under GAAP, refer to the tables on page13 of this release.

ADDITIONAL INFORMATION; CAUTIONARY STATEMENT -- Certain information in this press release is forward looking, including our projections as to earnings and 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: unanticipated increases in medical costs (including increased medical utilization, increased pharmacy costs, increases resulting from unfavorable changes in contracting or re-contracting 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); decreases in membership or failure to achieve desired membership growth due to significant competition or other factors; increases in medical costs or Group Insurance claims resulting from any acts of terrorism or otherwise; the ability to reduce administrative expenses while maintaining targeted levels of service and operating performance, and to improve relations with providers while taking actions to reduce medical costs; the ability to successfully implement Aetna's operating model to a projected growing membership base and to successfully implement multiple strategic and operational initiatives simultaneously; lower levels of investment income from continued low interest rates; adverse government regulation (including legislative proposals eliminating or reducing ERISA pre-emption of state laws that would increase potential litigation exposure, and other proposals, such as patients' rights legislation, 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; our ability to integrate, simplify, and enhance our existing information technology system and platform to keep pace with changing customer and regulatory needs; and the outcome of various litigation and regulatory matters, including litigation and ongoing reviews of business practices by various regulatory authorities (including the current industry wide investigation into insurance brokerage practices concerning broker compensation arrangements, bid quoting practices and potential antitrust violations being conducted by the New York Attorney General, the Connecticut Attorney General, and others, and for which the Company has received and may receive subpoenas, and may be subject to related litigation). For more discussion of important risk factors that may materially affect Aetna, please see the risk factors contained in Aetna's 2004 Annual Report on Form 10-K, on file with the Securities and Exchange Commission. You also should read Aetna's 2004 Annual Report on Form 10-K and Aetna's 2005 first quarter report on 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:

1Q05 Financial Supplement
(PDF: 894 KB / 15 pages)

1Q05 Earnings Tables
(PDF: 17 KB / 5 pages)

Guidance Summary

(PDF: 158 KB / 3 pages)

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