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Aetna (NYSE: AET)

Aetna (NYSE: AET). Jonathan Goh. Apr 22, 2008. Diversified Healthcare Benefits Traditional and consumer-directed health insurance Medical Pharmacy Dental Behavioral Health. Customers Employers Individual Groups College Students Part-time/Hourly Workers Government Units Labor Groups.

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Aetna (NYSE: AET)

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  1. Aetna (NYSE: AET) Jonathan Goh Apr 22, 2008

  2. Diversified Healthcare Benefits Traditional and consumer-directed health insurance Medical Pharmacy Dental Behavioral Health Customers Employers Individual Groups College Students Part-time/Hourly Workers Government Units Labor Groups Company Overview Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  3. Healthcare Small, mid-size, large multi-site national employers Point of Service (POS) Preferred Provider Organizations (PPO) Health Maintenance Organization (HMO) Indemnity plans Group Insurance Life Disability Long-term Care Large Case Pensions Retirement Products Annuity Products Business Segments Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  4. Revenue Streams • Primarily from premiums earned on insured products • Assume majority of financial risk • Employer Groups / Employees self-select • Government Units – MedicAid & MedicCare • Fees – administrative services contracts (ASC) • Investments Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  5. Revenue Streams Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  6. Investment Portfolio • As of December 31, 2007 • Debt and Equity - $15 billion • Average A+ Rating • Mortgage Loans - $1.5 billion • Mostly Agency Backed AAA loans • Short Term Investments - $1.3 billion • No material losses from sub-prime • Does not hold any CDOs, CLOs and SIVs Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  7. 2007 in Review • Strong growth in Healthcare medical membership • 1.4m in 2007 (including acquisitions) • 0.7m in 2006 • Acquisitions - $613 million • Share repurchase • 2007 – 33 million shares for $1.6 billion • 2006 – 60 million shares for $2.3 billion • Debt Issuance • 2007 - $700 million of senior notes • 2006 - $2 billion of senior notes Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  8. Outlook for 2008 • Strong healthcare membership growth • Retirement market • Reducing lower margin and maturing market • Level Group Insurance sales • Run-off of Large Case Pensions • Capital Redeployment • Continue to seek acquisitions • Share repurchase • $1.5 billion 5 year revolving credit facility with 21 banks; JPMorgan as administrative agent Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  9. Shareholders • Over 50% institutional shareholders • Legg Mason – 7% • State Street Corp – 6% • Capital Research Global Investment • Good ownership base • No incumbent shareholder Source: Bloomberg, accessed on Apr 21, 2008

  10. Industry Trends • Strong decline in commercial employer-based health plans • More directed to Consumer • Consumer-Directed Health Fund (Aetna) • Online management of choices • Constrained Public Care • MedicCare • MedicAid

  11. Strengths and Competitive Advantage • New markets and products drive top-level growth • Manages financial risks better than peers • Organic Growth • Online medical management system - CareEngine • Greater Flexibility and Choice in design features • Larger physician networks • Acquisitions • Schaller Anderson – Entry into the MedicAid market • GoodHealth Worldwide Limited – Expand HealthCare Product Offerings Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  12. Weaknesses and Risks • Declining employer-based insurance membership • Higher Deductibles and Lower-margins • Federal and state legislative and regulatory reforms • Advances in pharmaceutical and medical technology • Cost and effectiveness • Industry consolidation and increased competitiveness Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  13. Industry Analysis • Mid-March 2008 • WellPoint (NYSE: WLP) • Cut full year earnings by about $0.50 per share • Tumbled more than 28% • Attributed to rising health care costs & investment losses • Flu epidemic • 2 Top executives leave • Both WellPoint and UNH experienced declines in membership enrolment • Aetna only insurer that did not lose membership Source:Britt, R. et. al., “Health insurers take a dive on WellPoint's warning”, MarketWatch, Mar 11, 2008

  14. Industry Analysis Source: Yahoo Finance, AET Charts <http://finance.yahoo.com/charts?s=AET#chart8:symbol=aet;range=ytd;compare=unh+wlp+^gspc;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined>

  15. Valuation Source: Historical Financial Data from Form 10-K, Aetna, Inc (Feb 9, 2008)

  16. Valuation Source: Historical Financial Data from Form 10-K, Aetna, Inc (Feb 9, 2008) Selected data from Bloomberg, Accessed on Apr 21, 2008

  17. Sensitivity Analysis

  18. Market Comps and Peer Valuations Source: Market data from Bloomberg, Accessed on Apr 21, 2008

  19. Investment Thesis • Deeply undervalued because of industry implosion • Intrinsic Value of $52 - $64 • Return on Equity – 15-20% • Well positioned amongst competitors • Optimistic consumer targeted member growth • Employee • Retirement/MedicAid/MedicCare • Higher accreditation • Fortune’s Most Admired Healthcare (2008) • Lower risk investment assets

  20. Note for Future Analysts • Reported $0.92 EPS for 2008Q1 Earnings • Inline with estimates and projections • Up 14% from prior year - $0.82 • Lowered second quarter target • Raised enrollment targets for 2008 • Analyze future outlook of healthcare insurance industry • Aetna’s position amongst competitors • Ability to gain enrolment in the consumer-targeted market and maintain sustainable competitive advantage • Ability to manage financial risk and healthcare costs

  21. Questions?

  22. Appendices andSupporting Material

  23. Definition of Terms • Medicare • Health insurance programs for • people aged 65 or older • people under 65 but with disabilities • people of all ages with End-Stage Renal Disease • Medicaid • Low income individuals and families who cannot afford medical care • Pays the hospital bills directly • State administered program Source: US Department of Health and Services <http://www.cms.hhs.gov/MedicaidGenInfo/>

  24. Summary of Expansions • Expanding our individual and small group marketing into additional states • Expanding our capabilities to serve Government and labor customers • Expanding our Medicaid offerings to a total of 10 states, mostly through acquisition • Expanding our capabilities to serve retirees, particularly through our relationships with AARP and the HR Policy Association and our enhanced individual and group Medicare offerings; and • Expanding our expatriate offerings and global capabilities and reach, also through acquisition. Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  25. Snapshot of Total Membership Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  26. Group Insurance Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  27. Medical Benefit Ratio Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  28. Investment Securities Source: Form 10-K Aetna, Inc (Feb 9, 2008)

  29. Market Share Source: OneSource Business Browser; AET Analyst Report, Mar 20, 2008, Oppenheimer & Co, Inc

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