Aetna Reports Second-Quarter 2006 Results

HARTFORD, Conn., July 27, 2006 — Aetna (NYSE: AET) today announced second-quarter 2006 operating earnings of $0.65 per share. Operating earnings, excluding prior-period favorable reserve development, were $0.64 per share, an increase of 23 percent compared to the prior-year quarter. Favorable development was approximately $6.0 million, after tax, or $0.01 per share. The increase in operating earnings reflects a 14 percent increase in revenue, primarily from year-over-year membership growth, and continued expansion of the operating margin, primarily resulting from general and administrative expense efficiencies. Operating earnings exclude net realized capital gains (losses) and other items.1 Second quarter net income was $0.67 per share.

Quarterly Financial Results at a Glance

Three Months Ended
June 30
June 30

Total revenues
$6.3 billion
$5.5 billion
Operating earnings, excluding development** $371.1 million $312.8 million 19%
Net income $389.5 million $394.9 million (1%)
Per share results:      
Operating earnings** $0.65 $0.57 14%
Favorable development of prior-period health care cost estimates (0.01) (0.05)  
Operating earnings, excluding development** $0.64 $0.52 23%
Net income $0.67 $0.65 3%
Weighted average common shares (diluted) 584.2 million 607.0 million  
* Restated for FAS123R and stock split. Refer to footnote 2 at the end of this press release.

** For a full description of operating earnings and per-share operating earnings, refer to footnote 1 at the end of this press

"Our second-quarter results were marked by an improvement of 23 percent in operating earnings per share and a 14 percent increase in revenues over the prior-year quarter. We also continued to see expansion of our profit margin in the second quarter as our operating expenses as a percentage of revenue declined to 18.4 percent from 19.7 percent," said Ronald A. Williams, CEO and president.

"Despite these very strong financial results, certain areas of our business did not meet our expectations. These included a large government case and our Stop-Loss product, which were particularly impacted by higher-than-expected large claims; and our Small Group customer market, where we experienced heightened competitive pressures in certain geographic areas. These factors contributed to a higher overall Commercial Risk medical cost ratio of 81.4 percent, excluding development. We are taking specific corrective actions to address these issues.

"To be clear, we continue to believe that the outlook for Aetna and the industry overall remains bright, and that we are not seeing a change in fundamental dynamics. Our MCR, although higher, continues to be very competitive within our industry. And the flexibility of our operating model and active management allow us to meet challenges in the health care environment and still deliver positive results.

"Given our solid revenue growth, our success at managing operating costs and improved margins, we now expect full-year 2006 operating earnings per share to be in the range of $2.77 to $2.79, up from our prior guidance of $2.74 to $2.76. Furthermore, based on strong sales momentum and our demonstrated ability to win in the marketplace, we continue to expect operating earnings growth of at least 15 percent in 2007."3

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 qualified pension plans, reported:

Total Company results

A live audio webcast of the second-quarter results conference call will begin at 8:30 a.m. ET today. 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 877-502-9276, or 913-981-5591 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 2281824. Telephone replays will be available from 11:30 a.m. ET on July 27 until midnight ET on August 10.

Aetna is one of the nation's leading diversified health care benefits companies, serving approximately 29.9 million people with information and resources to help them make better informed decisions about their health care. Aetna offers a broad range of traditional and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life, long-term care and disability plans, and medical management capabilities. Our customers include employer groups, individuals, college students, part-time and hourly workers, health plans and government-sponsored plans.

1 Operating earnings exclude net realized capital gains and losses and other items 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 more useful comparison of the Company's underlying business performance from period to period. Management uses operating earnings to assess business performance and to make decisions regarding the Company's operations and allocation of resources among the Company's businesses. Operating earnings is also the measure reported to the Chief Executive Officer for these purposes. Each of these excluded items 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 reserve development. 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 reserve development better reflects the underlying current-period health care costs.

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

2 Effective January 1, 2006, the Company adopted FAS 123R applying the modified retrospective approach. Accordingly, all prior-period financial information was adjusted to reflect the Company's stock-based compensation activity. Additionally, results per common share and weighted average common shares have been adjusted to reflect the February 17, 2006 two-for-one stock split.

3 Projected operating earnings per share and operating expense ratio for full-year 2006 exclude $4.1 million of net realized capital gains for the six months ended June 30, 2006 and projected operating earnings, operating earnings per share and operating expense ratio for all periods also exclude any future net realized capital gains or losses from income from continuing operations. The Company is not able to project the amount of future net realized capital gains or losses and cannot therefore reconcile projected operating earnings to projected income from continuing operations, or to a projected change in income from continuing operations in any period. Projected operating earnings per share and Commercial Risk Medical Cost Ratio for full-year 2006 also exclude approximately $6 million, after tax, of favorable development of prior-period health care cost estimates for the second quarter of 2006. The Company believes excluding this reserve development better reflects the underlying current-period health care costs. Projected operating earnings per share and operating expense ratio for full-year 2006 also excludes the $6.2 million, after-tax, acquisition-related software charge reported in the first quarter of 2006 and the other items reported in the second quarter of 2006, as described in footnote 1. Projected operating earnings per share for 2006 assume approximately 580 million weighted-average diluted shares.

4 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 underwriting or servicing of products for customers and are not directly related to the core performance of the Company's business operations. Operating expenses exclude the other items described in footnote 1. For a reconciliation to operating expenses as a percentage of revenue calculated under GAAP, refer to the tables on page 13 of this press release.

5 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 the Company's performance, including performance versus competitors. Operating earnings used in the pretax margin calculation also exclude the items described in footnote 1. For reconciliation to operating margin calculated under GAAP, refer to the tables on page 13 of this press release.

ADDITIONAL INFORMATION; CAUTIONARY STATEMENT -- Certain information in this press release is forward looking, including our projections as to operating earnings, operating expense ratios, membership growth and medical cost ratios. 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, such as the increasing competitiveness we are experiencing in certain markets which could cause our membership to be lower than we expect and our medical cost ratios to be higher than we expect. 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, reputational issues or other factors; increases in medical costs or Group Insurance claims resulting from any acts of terrorism, epidemics or other extreme events; 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 related litigation). For more discussion of important risk factors that may materially affect Aetna, please see the risk factors contained in Aetna's 2005 Annual Report on Form 10-K, on file with the Securities and Exchange Commission. You also should read Aetna's 2005 Annual Report on Form 10-K and Aetna's 2006 second 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:

2Q06 Financial Supplement
(PDF: 189 KB / 17 pages)

2Q06 Earnings Tables
(PDF: 130 KB / 5 pages)

Guidance Summary

(PDF: 37 KB / 3 pages)

Copyright Aetna Inc.