Aetna Reports Fourth-Quarter And Full-Year 2006 Results



HARTFORD, Conn., February 8, 2007 — Aetna (NYSE: ΑET) today announced fourth-quarter 2006 operating earnings, excluding prior-period favorable reserve development and a previously announced severance charge, of $0.76 per share. Including the severance charge of $0.03 per share, operating earnings, excluding reserve development, were $0.73 per share, an increase of 18 percent compared to the prior-year quarter. Prior-period favorable reserve development was $0.05 per share. The increase in operating earnings reflects revenue growth from year-over-year membership growth and premium and fee rate increases, as well as solid underwriting results and continued general and administrative expense efficiencies. Fourth-quarter net income was $0.80 per share, an increase of 14 percent over the prior-year quarter.

Full-year 2006 operating earnings increased by 29 percent over the prior year to $2.87 per share, excluding prior-year favorable reserve development of $0.03 per share. Net income was $2.99 per share, an increase of 15 percent over the prior year. Operating earnings exclude net realized capital gains and other items.1

"We are pleased to have delivered another year of strong results in 2006," said Ronald A. Williams, chairman and CEO. "Our full-year operating earnings per share increased by 29 percent; our revenues expanded by 12 percent; our medical membership grew by 678,000 to 15.4 million; and we improved our operating expense ratio by 100 basis points, even after continuing to make significant investments in growing our business.

"The substantial steps we took in 2006 to differentiate the company as a leader and position it for future profitable growth included: Aetna also advanced its leadership in health care consumerism and medical management, with the goal of being the most preferred company in our industry. These efforts included:
Quarterly Financial Results at a Glance

Three Months Ended
December 31
2006
December 31
2005*
Change
 
Total revenues
$6.4 billion
$5.9 billion
8%

Operating earnings, excluding development**
$395.2 million $367.3 million 8%
Net income $434.1 million $416.3 million 4%
Per share results:      
Operating earnings** $0.78 $0.68 15%
Favorable development of prior-period health care cost estimates (0.05) (0.06)  
Operating earnings, excluding development** $0.73 $0.62 18%
Net income $0.80 $0.70 14%
Weighted average common shares (diluted) 541.8 million 596.6 million  
* Restated for FAS123R and stock split. Refer to footnote 2 at the end of this release.
** For a full description of operating earnings and per share operating earnings, refer to footnote 1 at the end of this release.
2006 Financial Results at a Glance

Twelve Months Ended
December 31
2006
December 31
2005*
Change
 
Total revenues
$25.1 billion
$22.5 billion
12%

Operating earnings, excluding development**
$1.6 billion $1.3 billion 21%
Income from continuing operations $1.7 billion $1.6 billion 7%
Income from discontinued operations 16.1 million - -    
Net income $1.7 billion $1.6 billion 8%
Per share results:      
Operating earnings** $2.90 $2.49 16%
Favorable development of prior-year health care cost estimates (0.03) (0.26)  
Operating earnings, excluding development** $2.87 $2.23 29%
Income from continuing operations $2.96 $2.60 14%
Income from discontinued operations 0.03 - -    
Net income $2.99 $2.60 15%
Weighted average common shares (diluted) 569.1 million 606.0 million  
* Restated for FAS123R and stock split. Refer to footnote 2 at the end of this release.
** For a full description of operating earnings and per share operating earnings, refer to footnote 1 at the end of this release.

"With an increasing focus nationally on health care policy, we are determined to be part of the solution by working to increase access and affordability to quality health care," Williams said. "In fact, a number of our offerings, including those for individuals, small groups, students and part-time and hourly workers, are targeted to the uninsured. Aetna's product and service innovations have attracted new customers and strengthened relationships with existing customers.

"For full-year 2007, we project operating earnings to be $3.30 per share, an increase from our prior guidance of $3.26. We project our first-quarter 2007 operating earnings per share to be $0.77 per share, a 20 percent increase over the 2006 first-quarter level. As a result of our continuing strategic efforts to expand our opportunities for profitable growth, we believe that Aetna is very well positioned to continue to sustain long-term operating earnings per-share growth of 15 percent."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:


Full-year 2006 operating earnings for Health Care were $1.6 billion, compared with 2005 operating earnings of $1.4 billion, including reserve development. Excluding favorable reserve development, operating earnings increased 23 percent to $1.6 billion in 2006, compared with $1.3 billion for 2005. Favorable reserve development was $12 million after tax in 2006, and $159 million after tax in 2005. Full-year 2006 operating earnings were higher primarily due to higher membership levels, growth in revenues from increased premiums and fees, as well as solid underwriting results and continued general and administrative expense efficiencies. Full-year net income for 2006 was $1.5 billion, compared with $1.4 billion for 2005. Full-year Commercial Risk MCR was 79.4 percent, compared to 78.4 percent for 2005. Including favorable reserve development, the Commercial Risk MCR was 79.3 percent for 2006 compared to 76.9 percent for 2005. Full-year medical membership growth was 678,000, an increase of 4.6 percent.

Group Insurance business results

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


For full-year 2006, Group Insurance reported operating earnings of $132.7 million, compared with $127.7 million in 2005. The increase was primarily due to higher risk underwriting margins offset in part by higher operating expenses. Full-year net income for 2006 was $133.9 million, compared with $136.4 million for 2005.

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:


For full-year 2006, Large Case Pensions reported operating earnings of $38.9 million, compared with $33.2 million for 2005. Full-year net income for 2006 was $122.6 million compared with $82.0 million for 2005. Net income for full-year 2006 and 2005 includes $75.0 million and $43.4 million, respectively, of after-tax benefits related to the reduction of reserves for discontinued products.

Total company results


A live audio webcast of the fourth-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 www.aetna.com. 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 877-502-9274, or 719-457-0820 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 www.aetna.com or by dialing 888-203-1112, or 719-457-0820 for international callers. The replay access code is 2472704. Telephone replays will be available from 11:30 a.m. ET on Feb. 8 until midnight ET on Feb. 21.

Aetna is one of the nation's leading diversified health care benefits companies, serving approximately 35.9 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. www.aetna.com



1 Operating earnings exclude net realized capital gains and losses and other items, if any, 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 the 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 Company's 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 11 to 15 of this 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 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 therefore cannot 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 for full-year 2007 assume approximately 536 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 15 of this 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 the 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 a reconciliation to operating margin calculated under GAAP, refer to the tables on page 15 of this release.


ADDITIONAL INFORMATION; CAUTIONARY STATEMENT -- Certain information in this press release is forward looking, including our projections as to operating earnings. 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, including failure to achieve desired membership growth due to significant competition, reputational issues or other factors in key geographic markets where membership is concentrated; 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); and the ability to reduce administrative expenses while maintaining targeted levels of service and operating performance. Other important risk factors include, but are not limited to: the ability to improve relations with providers while taking actions to reduce medical costs; the ability 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 or medical cost experience of membership in key markets; our ability to integrate, simplify, and enhance our existing information technology systems and platforms to keep pace with changing customer and regulatory needs; 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); and increases in medical costs or Group Insurance claims resulting from any acts of terrorism, epidemics or other extreme events. 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 ("SEC"), and Aetna's 2006 Annual Report on Form 10-K when filed with the SEC. You also should read Aetna's 2006 Annual Report on Form 10-K when filed with the SEC for a discussion of Aetna's historical results of operations and financial condition.


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