Aetna (NYSE: AET)

Aetna (NYSE: AET)

Jonathan GohApr 22, 2008

Company Overview

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

Source: Form 10-K Aetna, Inc (Feb 9, 2008)

Business Segments

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

Source: Form 10-K Aetna, Inc (Feb 9, 2008)

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)

Revenue Streams

Source: Form 10-K Aetna, Inc (Feb 9, 2008)

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)

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)

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)

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

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

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)

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)

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

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>

Valuation

2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E 2012E TV

Net Income 1,442 1,760 2,453 2,587 2,796 1,763 2,098 2,514 2,794 2,944% Change YOY 22% 39% 5% 8% -37% 19% 20% 11% 5%

+Depreciation and Amort 149 182 204 270 322 312 366 412 476 526

% Change YOY 22% 12% 32% 19% -3% 18% 12% 16% 11%+Changes in Net Working Cap 109 (1,481) (11,616) 166 638 (145) 18 (111) 18

% Change YOY 0% -1457% 684% -101% 285% -123% -113% -703% -117%+Capital Expenditure (211) (190) (272) (291) (400) (287) (380) (461) (521) (525)

% Change YOY -10% 43% 7% 38% -28% 33% 21% 13% 1%=Free Cash Flow 1,861 905 (9,050) 2,883 2,426 1,940 2,483 2,638 2,963

% Change YOY -51% -1100% -132% -16% -20% 28% 6% 12%

PV FCF 2,193 1,585 1,835 1,762 1,789PV TV 24,204

Sustainable Growth Rate 3%

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

Valuation

Cost of Capital Capital Structure

Current 10-Year Treasury 3.71% MV Equity 20,927 % Equity 86.96%Historical Market Return 12.30% MV Debt 3,138 % Debt 13.04%Historical T Bill 3.80% MV Assets 24,065Beta 0.9574Cost of Equity 11.85%Cost of Debt 3.65% Source: Bloomberg (Apr 21, 2008)Tax Rate 34.52% Source: Bloomberg (Apr 21, 2008)Cost of Capital 10.61%

Value of Operations 33,369

Non-Operating Assets (Cash, etc) 1,254Non-Equity Claims 3,138Value of Equity 28,977

Number of Shares 496.6 Source: Bloomberg (Apr 21, 2008)Intrinsic Value 58.35

+10% 64.19

-10% 52.52

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

Selected data from Bloomberg, Accessed on Apr 21, 2008

Sensitivity Analysis

58.35 2.00% 2.50% 3.00% 3.50% 4.00% 4.50%

9.00% 66.94 71.58 77.00 83.41 91.09 100.4910.00% 57.16 60.55 64.43 68.91 74.14 80.3110.61% 57.16 60.55 64.43 68.91 74.14 80.3111.00% 49.56 52.13 55.02 58.29 62.04 66.3612.00% 43.49 45.48 47.70 50.18 52.97 56.1313.00% 38.53 40.12 41.86 43.79 45.93 48.3214.00% 34.41 35.69 37.09 38.61 40.30 42.16

Market Comps and Peer Valuations

Aetna, Inc S&P500

Current P/E (ttm) 12.13 Current P/E (ttm) 17.67

Forward P/E (1yr) 9.28 Forward P/E (1/yr) 14.86

Current EPS (ttm) 3.47 Peer Group

Last Close $42.14 Current P/E (ttm) 15.96

Implied Earnings

$4.54 Discount to Peer

24%

Earnings Growth

31%

52 Week Range 39.02-60.00

Historical P/E (5 yrs)

15.21

Discount 20%

Dividend Yield 0.10%Source: Market data from Bloomberg, Accessed on Apr 21, 2008

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

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

Questions?

Appendices andSupporting Material

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/>

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)

Snapshot of Total Membership

Source: Form 10-K Aetna, Inc (Feb 9, 2008)

Group Insurance

Source: Form 10-K Aetna, Inc (Feb 9, 2008)

Medical Benefit Ratio

Source: Form 10-K Aetna, Inc (Feb 9, 2008)

Investment Securities

Source: Form 10-K Aetna, Inc (Feb 9, 2008)

Market Share

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