2012 Investor Conference DECEMBER 12, 2012 - Aetna · 2012-12-12 · 2012 Aetna Investor Conference| December 12, 2012 Aetna Inc. Certain information in this presentation is forward-looking,

2012 Investor

Conference DECEMBER 12, 2012

Aetna Inc. 2012 Aetna Investor Conference| December 12, 2012

Certain information in this presentation is forward-looking, including our projections, estimates and expectations as to operating earnings, operating earnings per share, weighted average diluted shares, revenues, the financial and operational impacts and benefits of the proposed Coventry Health Care, Inc. transaction, the synergies that may result from the proposed transaction, the integration of the proposed transaction, membership, operating and financial metrics, and the impact of the proposed transaction on any of these metrics, and our other financial and non-financial projections, and our estimates and views regarding our businesses and the environment in which we operate our businesses. 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, but not limited to: the implementation of health care reform legislation; the timing to consummate the proposed acquisition of Coventry; the risk that a condition to closing of the proposed acquisition may not be satisfactory; the risk that a regulatory approval for the proposed acquisition is delayed, is not obtained or is subject to conditions that are not anticipated; our ability to achieve the synergies and the value creation contemplated by the proposed acquisition; our ability to promptly and effectively integrate Coventry’s businesses; the diversion of management time on acquisition related issues; and changes in Aetna's future cash requirements, capital requirements, results of operations, financial condition and/or cash flows. Health care reform will significantly impact our business operations and financial results, including our medical benefit ratios. Components of the legislation will be phased in over the next six years, and we will be required to dedicate material resources and incur material expenses during that time to implement health care reform. Many significant parts of the legislation, including health insurance exchanges, Medicaid expansion, the scope of "essential benefits," employer penalties and the implementation of minimum medical loss ratios, require further guidance and clarification at both the federal level and/or in the form of regulations and actions by state legislatures to implement the law. In addition, pending efforts in the U.S. Congress to repeal, amend, or restrict funding for various aspects of health care reform, and the possibility of additional litigation challenging aspects of the law continue to create additional uncertainty about the ultimate impact of health care reform. As a result, many of the impacts of health care reform will not be known for the next several years. Other important risk factors include: adverse and less predictable economic conditions in the U.S. and abroad (including unanticipated levels of, or increases in the rate of, unemployment); adverse changes in health care reform and/or other federal or state government policies or regulations as a result of health care reform or otherwise (including legislative, judicial or regulatory measures that would affect our business model, restrict funding for or amend various aspects of health care reform, limit our ability to price for the risk we assume and/or reflect reasonable costs or profits in our pricing, such as mandated minimum medical benefit ratios, eliminate or reduce ERISA pre-emption of state laws (increasing our potential litigation exposure) or mandate coverage of certain health benefits); our ability to differentiate our products and solutions from those offered by our competitors, and demonstrate that our products lead to access to better quality of care by our members; unanticipated increases in medical costs (including increased intensity or medical utilization as a result of flu, increased COBRA participation rates or otherwise; changes in membership mix to higher cost or lower-premium products or membership-adverse selection; 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; increases resulting from unfavorable changes in contracting or re-contracting with providers, and increased pharmacy costs); failure to achieve and/or delays in achieving desired rate increases and/or profitable membership growth due to regulatory review or other regulatory restrictions, the difficult economy and/or significant competition, especially in key geographic areas where membership is concentrated, including successful protests of business awarded to us; adverse changes in size, product mix or medical cost experience of membership; our ability to diversify our sources of revenue and earnings; adverse program, pricing or funding actions by federal or state government payers, including as a result of sequestration and/or curtailment or elimination of the Centers for Medicare & Medicaid Services' star rating bonus payments; the ability to reduce administrative expenses while maintaining targeted levels of service and operating performance; the ability to successfully implement our agreement with CVS Caremark Corporation on a timely basis and in a cost-efficient manner and to achieve projected operating efficiencies for the agreement; our ability to integrate, simplify, and enhance our existing information technology systems and platforms to keep pace with changing customer and regulatory needs; the success of our health information technology initiatives; our ability to successfully integrate our businesses (including Medicity, Prodigy Health Group, PayFlex, and Genworth Financial Inc.'s Medicare Supplement business and other businesses we may acquire in the future, including Coventry) and implement multiple strategic and operational initiatives simultaneously; managing executive succession and key talent retention, recruitment and development; the outcome of various litigation and regulatory matters, including guaranty fund assessments and litigation concerning, and ongoing reviews by various regulatory authorities of, certain of our payment practices with respect to out-of-network providers and/or life insurance policies; reputational issues arising from our social media activities, data security breaches, other cybersecurity risks or other causes; the ability to develop and maintain relations with providers while taking actions to reduce medical costs and/or expand the services we offer; our ability to maintain our relationships with third party brokers, consultants and agents who sell our products; increases in medical costs or Group Insurance claims resulting from any epidemics, acts of terrorism or other extreme events; and a downgrade in our financial ratings. For more discussion of important risk factors that may materially affect Aetna, please see the risk factors contained in Aetna's 2011 Annual Report on Form 10-K ("Aetna's Annual Report"), Aetna's Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 (Aetna's “First Quarter 10-Q”), Aetna's Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (Aetna's “Second Quarter 10-Q"), and Aetna's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 (together with Aetna's First Quarter 10-Q and Second Quarter 10-Q, Aetna's "Quarterly Reports"), each on file with the Securities Exchange Commission (SEC). You also should read Aetna's Annual Report and Aetna's Quarterly Reports for a discussion of Aetna's historical results of operations and financial condition.

2

Cautionary Statement; Additional Information


Agenda

3

9:00

9:05

9:45

10:25

11:05

11:20

12:00

1:00

1:30

2:15

Welcome | Cowhey

Aetna’s strategy for success (40 mins) | Bertolini

Strategic execution (40 mins) | Zubretsky

Q&A: core business (40 mins) | Matus, McCauley, Rohan

Break (15 mins)

Next generation networks (40 mins) | Kennedy, Thomas

Lunch (with Aetna Management) (1 hour)

Financial outlook and capital plan (30 mins) | Zubretsky

Q&A (45 mins) | Bertolini, Zubretsky

Conclusion | Bertolini

Aetna’s Strategy for Success Mark Bertolini Chairman, Chief Executive Officer and President


Agenda

Why Aetna?

The changing environment

Aetna’s strategy to create shareholder value

Conclusion

5


Who We Are: The Aetna Way

6

We put the people we serve at the center of everything we do The Aetna Way outlines the values by which we live, as the foundation for our culture, strategy and how we run our business


Aetna’s Executive Team

7

Mark T. Bertolini Chairman, Chief Executive Officer and President

Joe Zubretsky Finance, Investment Management and Emerging Businesses

Meg McCarthy Innovation, Technology and Service Operations

Bill Casazza Law and Regulatory Affairs

Robert Mead Marketing, Product and Communications

Deanna Fidler Human Resources

Frank McCauley Commercial Businesses

Sandip Patel International

Lonny Reisman, MD Chief Medical Officer

Jeff Emerson Health Care Management and Regions and Specialty Products

Kristi Matus Government Services

Steve Kelmar Chief of Staff Office of the Chairman, CEO and President

Karen Rohan Coventry Integration, Specialty Business

http://www.aetna.com/about-aetna-insurance/aetna-corporate-profile/corporate-bios/

http://www.aetna.com/news/bios/reisman.html


How Aetna Will Grow

8

Diversified portfolio of businesses can enable

predictable growth

Large group business can

profitably grow

Government franchise is a growth engine

Accountable care solutions is

enhancing the core

Small group and individual are an opportunity

Coventry is strategically and

financially attractive


Aetna’s Shareholder Value Creation Model

9

Advance the core business 4%+ Growth

Emerging business growth Enhances core

Deploy capital effectively 6%+ Growth

• Shareholder dividend • Invest in organic growth • Disciplined M&A • Share repurchases

• Effective health care networks

• Affordable products

• Transform the network model

• Engage consumers

Target low double-digit Operating EPS growth on average

over time


Why Invest in Aetna?

10

Results

Strategy

Growth

Aetna’s differentiated strategy can create competitive advantages and drive profitable

growth

Aetna’s well-positioned and diversified portfolio can produce superior

results

Aetna’s 2010-2013P Operating EPS CAGR of 13.6%* is higher than any of its diversified MCO peers

Aetna targets low double- digit Operating EPS growth on average over time

*Source Thomson Reuters and Company Guidance.


Agenda

Why Aetna?



Conclusion

11


The External Environment Influences Aetna’s Strategy

12

Next Generation Networks

Consumer Engagement

Next Generation Platforms

Coventry Acquisition

Unsustainable health cost

growth

Increased consumer involvement

Provider consolidation

Health information technology

Inefficiency is adding to health

care costs

Aetna’s strategic pillars address changing marketplace needs

Aetna’s strategic pillars


Health Care Premiums are Growing at 3x the Rate of Inflation and Wages

13

Cumulative increases from 1999-2012

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2012.

Bureau of Labor Statistics, Consumer Price Index and Employment Statistics Survey

172% Health insurance

premiums

38% Overall inflation

47% Workers’ earnings


The Health Care System Produces $750 Billion in Yearly Waste

14

Source: Institute of Medicine; 2009 data

~30% of health spending is waste

Fraud Unnecessary services

Inefficient care delivery

Excess administrative costs

Inflated prices

Prevention failures

U.S. health care

system waste

27% 7%

10%

14%

17% 25%


48% (contributions + out of pocket) 52%

2007 - 2012P COST INCREASE

$6,228 $2,989 $3,239

COST SHARE

Consumers are Paying for Half the Increase in Medical Premiums

15

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2012. Bureau of Labor Statistics, Consumer Price Index and Employment Statistics Survey

Consumer Employer


70% of Medical Practices Owned by Hospitals

16

Changing hands MEDICAL PRACTICE OWNERSHIP

2002 2008 2011 2005

70%

60%

50%

40%

30%

20%

Hospital owned

Physician owned

Mix shift to government

services

Cost shift pressure

Enhanced IT investments

Source: MGMA Physician Compensation and Production Survey Report, WSJ, Accenture

By 2013, only 1 in 3 physicians will be “truly” independent


Information Technology is Fundamentally Changing Health Care Interactions

17

One in three cell phone users uses their phone to look for health information

Source: Pew Research Center, Mobile Health 2012. Apple, the Apple logo and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.


Agenda

Why Aetna?


Aetna’s strategy to create shareholder value • Aetna’s strategic pillars • Advance the core • Emerging business growth • Deploy capital effectively

Conclusion

18


The Road to Superior Value

19

Enable access and

affordability

Put the consumer at the center of their

own health care decision making

Transform the

network model

Coventry acquisition

Next generation networks

Next generation networks

Next generation platforms

Consumer engagement

Next generation platforms

Consumer engagement

Coventry acquisition

Strategically compelling, financially attractive,

manageable risk


Next Generation Networks: Aetna’s Accountable Care Solutions Goals

20

Aetna’s Accountable Care Solutions are focused on lowering costs and growing membership in our core

Enter into collaborative risk sharing arrangements with providers

Receive best-in-market provider unit costs

Launch new insurance products in the marketplace

Grow membership faster than the marketplace at target margins


Consumer Engagement: Managing Your Whole Health

21



22

Employers Consumers

Tolerant of complexity

Demand simplicity

Cost conscious

Demand superior value

Aetna is re-engineering our business platforms to meet changing consumer needs We are committed to achieving productivity improvements to offset inflation

Not about doing what we do today more efficiently…

about reconsidering what we do and why we do it


Acquisition of Coventry Health Care

23

$50 Billion

$4.3 Billion

$2.4 Billion

Note: Combined Aetna + Coventry metrics are estimated pro forma for 2012.

Pro Forma Revenues

Pro Forma EBITDA

Pro Forma Parent

Cash Flow

Strategically compelling and financially attractive acquisition


Agenda

Why Aetna?



Conclusion

24


Aetna’s Diversified Portfolio

25

% of 2012E Revenue

Reform Outlook

% of 2012E EBITDA

Commercial ASC and Fee Businesses 10% Stable 25%

Large Group Insured 44% Stable 43%

Small Group and Individual 16% Dynamic 7%

Medicare 18% Balanced 15%

Medicaid 6% Growth 3%

Group Insurance 6% Stable 7%

Aetna’s diversified portfolio mitigates reform risk and is well-positioned in high-growth businesses

Based on full year 2012 estimates. When calculating Aetna’s EBITDA, allocation of depreciation and amortization expense to the product groups presented above is estimated.


% of 2012E Revenue

Reform Outlook

% of 2012E EBITDA







Aetna’s Diversified Portfolio

26

% of Combined 2012E Revenue

Reform Outlook

% of Combined 2012E EBITDA







Aetna’s diversified portfolio mitigates reform risk and is well-positioned in high-growth businesses

Based on full year 2012 estimates. CVH Medicaid EBITDA normalized for Kentucky impact. When calculating Aetna’s EBITDA, allocation of depreciation and amortization expense to the product groups presented above is estimated.

+ +


Traditional Growth Drivers Across Aetna’s Core Portfolio

27

Medicaid Medicare Small Group and Individual

Large Group Insured

Commercial ASC

Improving discount position

Enhanced cross-sell opportunities

Continued focus on targeted customers

International expansion

Exchange-based growth

Targeted geographies

Brand preference

Group MA conversions

Individual MA targeting

Medicare Supplement

ACA expansion

New State procurements

Dual Eligible opportunity

Growth across Aetna’s core will be enhanced by our Emerging Businesses

MA = Medicare Advantage

Aetna Inc. 2012 Aetna Investor Conference| December 12, 2012 28

Strategically Compelling

Financially Attractive

Manageable Execution Risk


Coventry Acquisition is Strategically Compelling

29

Increased membership and diversification

Increased government programs presence

Represents over 30% of pro forma revenues and 22% of pro forma EBITDA*

Improved positioning and reach in exchange-based businesses Complementary Commercial Insured Businesses

Enhanced capabilities for 2014 and beyond Low-cost platforms and value-based networks

22 million combined medical members

*Note: Combined Aetna + Coventry metrics are estimated combined for 2012. When calculating Aetna’s EBITDA, allocation of depreciation and amortization expense to the product groups presented above is estimated.


Coventry Acquisition is Financially Attractive

Modest

$0.45

$0.90

2013P 2014P 2015P

30

Highly Accretive

2015P ROIC in the low double digits

2015P ROE in the high teens

Operating EPS Accretion

Return on invested capital (ROIC) and return on equity (ROE) projections exclude the impact of transaction and integration expenses.


Coventry Acquisition Risk is Manageable

31

Execution Synergies

Capital management

Aetna’s synergy estimates are highly achievable and leave room for upside from revenue and cross-sell synergies

Transaction structure minimizes equity issued and takes advantage of historically low interest rate environment

Committed to lowering debt to capital ratio to 35% two years post closing

Coventry is comprised of businesses that we know well and are experienced at operating


Agenda

Why Aetna?



Conclusion

32


From Open Access to a More Integrated Model

33

Indemnity Medical

Plans

Strong-form

HMOs

Open Access Plans

Consumer Directed Health Plans

Aligned, Integrated

Care

1970s 2000s 2012

Aetna’s Accountable Care Solutions is leading the way


Provider Reimbursement Pressures

34

Changing reimbursement

mix

State budget deficits

Commercial pricing

pressure

Medicare and Medicaid are over 55% of provider

revenues

Medicaid is one of the top three state

budget items… and growing

Federal rate

pressures

$716 billion of ACA related

Medicare reductions

Cost shifting is out of runway

ACOs can help alleviate provider reimbursement pressures


Alternative Approaches to Integration

35

Virtual Integration Vertical Integration

Capital light

Increased flexibility

Aligned incentives

Highly scalable

Strong return on capital

Enter risk sharing collaborations with providers

Buy medical facilities or

physician groups

Capital intensive

Dependent on M&A availability

Enforced change

Difficult to scale

Lower return profile

Aetna’s virtual integration approach works better than vertical integration and is more capital efficient

vs.


Aetna’s Population Management Tools

MOBILE CONNECTIVITY

CONSUMER ENGAGEMENT

HEALTH INFORMATION EXCHANGE

DISTRIBUTED APPLICATIONS

Aetna’s differentiated solutions enable a new collaborative model for virtual integration

CLINICAL DECISION SUPPORT & WORKFLOW MANAGEMENT

36

HEALTH PLAN PRODUCTS AND

SERVICES


Aetna’s Accountable Care Activity

37

Over 200 deals in the pipeline covering 60% of the U.S. Population

15 signed

ACS relationships

Launched almost

100 new

products

Commercial, Medicare

and Medicaid

Addressable market of

over

12 million

members


Agenda

Why Aetna?



Conclusion

38


Capital Deployment and Priorities

39

Shareholder dividend

Invest in organic growth

Disciplined M&A

Share repurchases

Demonstrates confidence in strategy and cash flows

Committed to deploy over $9 billion of capital in the last 2 years

Repurchased 33%* of outstanding shares over the last 5 years

25%+ return on incremental capital

Aetna has been a leader in effective capital deployment *Net of shares issued during the period of 9/30/07 through 9/30/12.


Agenda

Why Aetna?



Conclusion

40


Conclusion

41

Consistent growth by meeting the needs of our customers

Well positioned strategy

Focused on execution

Diversified portfolio

Reform opportunity

Continued strong operating earnings per share growth

2012E Operating EPS(1) of approximately $5.10

2013P Operating EPS(1) of at least $5.40, a 13.6% CAGR since 2010

Target low double-digit Operating EPS growth on average over time

Strategic Execution Joe Zubretsky Senior Executive Vice President and Chief Financial Officer





How Aetna Will Grow

43

Large group businesses can profitably grow



enhancing the core

• Aetna’s diversified portfolio is a strength • Track record of strong margins • Strong capital generation and deployment • Coventry enhances Aetna’s diversified portfolio


predictable growth


Shifting income bracket

Job loss

Aging-out of parent’s plan

Aging-in to Medicare

Medicare supplement

Medicare

Medicaid

Diversification Enables Valuing a Member for Life

44

from to

Employer-sponsored Group



Individual

Individual

Individual



Medicaid

Medicaid

Life-event transition

CHURN

TO

TO

CHURN

Aetna offers products that can meet members’ needs through all stages of their lives


Workers Comp

Medicare

Medicaid

ASC

Large Group Insured

Exchange Based Insured

Aetna’s Diversified Portfolio of Products

45

Commercial Government Emerging Fee-Based

& Other

Group Insurance

Aetna’s diversified approach mitigates downside risk and helps to generate sustainable growth

Coventry enhances our diversified portfolio

Accountable Care Solutions

International

Cros

s-Se

ll Sp

ecia

lty P

rodu

cts


Aetna Has a Well Diversified Geographic Footprint

500k+ members 200k-500k members

<100k members 100k-200k members

Aetna Medical Membership Key

Significant membership base with room for growth

FL

AK

VA

PA

WV OH

IL

MI WI

KY

TN NC

SC GA AL

LA

AR

UT KS

WA

MT

NY MN

NE

MO

OK

IA

SD

ND

NM

CO

WY

AZ

ID OR

NV

TX

CA

NJ DE

DC MD

VT NH MA

CT RI

HI

IN

MS

ME

FL

As of 9/30/12.


The Coventry Acquisition Further Enhances Aetna’s Geographic Diversification

500k+ members 200k-500k members

<100k members 100k-200k members

Pro Forma Medical Membership Key

Coventry enhances Aetna’s national footprint

FL

AK

VA

PA

WV OH

IL

MI WI

KY

TN NC

SC GA AL

LA

AR

UT KS

WA

MT

NY MN

NE

MO

OK

IA

SD

ND

NM

CO

WY

AZ

ID OR

NV

TX

CA

NJ DE

DC MD

VT NH MA

CT RI

HI

IN

MS

ME

FL

As of 9/30/12; Coventry membership excludes the contribution from Kansas Medicaid.


Aetna’s Diversified Revenue and Profit Base is a Strength

48

Note: All metrics based on 2012 estimates, excluding Large Case Pensions and Corporate Financing. *Small Group = 2-50 eligible employees. When calculating Aetna’s EBITDA, allocation of depreciation and amortization expense to the product groups presented above is estimated.

Medicaid Medicare Small Group* and

Individual

Large Group Insured

Commercial ASC and Fee Businesses

Aetna seeks to substantially increase government program revenue and profit over the next several years

2012E Revenue $35.5B

2012E EBITDA

$3.4 billion

6%

18%

16%

44%

3%

15%

43%

25% 7%

Government programs ~18%

10% 6% 7%

Group Insurance


Aetna’s Businesses are Producing Revenue Growth(2)

49

2011 2012E 2012E Growth

2013P Momentum

Fee and Other Income $3.4 $3.5 3% +

Large Group Insured $14.9 $15.6 +

Small Group and Individual $5.7 $5.6 (1)% Flat

Medicare $5.6 $6.3 +++

Medicaid $1.7 $1.9 14% +

Total* $33.6 $35.5 ~6% ~9% growth

Strong revenue growth prospects again in 2013

5%

14%

* Includes Group and Large Case Pensions.


Aetna has a Demonstrated Track Record of Margin Sustainability

10.3%

6.4% 8.0%

10.2% 8.5 to 9.0%

8.0% ±

25 bps

2008 2009 2010 2011 2012E 2013P

Pre-tax Operating Margins(3)

50

Average= 8.6%*

Aetna’s Operating Margins are consistently amongst the highest in the Managed Care Sector

* Using midpoint of guidance for 2012E and 2013P.






predictable growth

How Aetna Will Grow

51



enhancing the core


• Sustainable margin profile • Middle Market is a growth driver • National Accounts is positioned for

growth • ACOs drive cost advantage

leading to growth • Minimal health reform impact


Aetna has a Leading ASC Franchise

52

Commercial ASC represents 25% of Aetna’s EBITDA

Almost two-thirds of the Fortune 100 use Aetna

Strong fee yields and high teens operating margin profile

Strong cash flow, low capital requirements

Opportunities: Cross-sell, Prodigy, Private Exchanges, ACOs

Aetna’s Commercial ASC business is showing strong momentum

Commercial ASC and Fee Businesses

Other businesses

75%

25% 2012E EBITDA of $3.4 Billion

When calculating Aetna’s EBITDA, allocation of depreciation and amortization expense to the product groups presented above is estimated.


Focusing on Discounts in Aetna’s Target Geographies Yields Results

Changes to our contracting guidelines and training

Enhanced hospital contract negotiations in targeted

areas

Physician contracting strategy to ensure competitiveness and

consistency

Foster transparency and collaboration by engaging

our key constituents

Top 30 National Account Market Areas: Relative Discount Improvement

Note: Estimated improvement in discount gap based on Hewitt data and Aetna projections.

Projecting to be within 2 discount points of the leader in 26 of the top 30

market areas for 2013

53

7 7

13 13

9 11

11 13

2010 2011 2012E 2013P

# of market areas that are #1

Additional market areas that are within 2pts


Conversion Opportunities in ASC

54

11.6 million Commercial

ASC Members*

Medicare Advantage Private Exchanges

1.1 M member potential

TRS Conversion ASC to Risk: ~$25 PMPM ~$1,000 PMPM

Currently participate in 11 existing private exchanges

Reform and move to defined contribution model are drivers

ASC conversion can create new growth opportunities in the insured marketplace

Contribution margin 10-12x Contribution margin 4-5x

* At September 30, 2012


Aetna’s Commercial Insured Business is Driven by Large Groups

55

Large Group represents 43% of Aetna’s EBITDA

Middle Markets, Public & Labor and International demonstrating growth

Strong operating margin profile

Priced consistent with trend and targeted return profile

Aetna’s Large Group Commercial Insured business is a stable and persistent profit base for the company

Large Groups

Other businesses

43%

57%

2012E EBITDA of $3.4 Billion



Pricing to Trend Produces an Inherent Revenue Growth Rate

56

Price to Trend

Maintain Target Margin

Profit Growth Membership

Underwriting profit*

2011 to 2012E

7%

Aetna’s Large Group Commercial Insured business can grow revenues and operating profit in a flat membership environment

(1%)

5%

Revenue

* Adjusted for prior year development

3%


Large Group Commercial Outlook

57

Commercial ASC

Large Group Insured

• Aetna has one of the premier franchises for serving large group customers

• Over two-thirds of Aetna’s EBITDA is produced by our Commercial ASC / Fee and Large Group Insured businesses

• Limited reform impact to large group businesses

• These core businesses have demonstrated excellent persistency and consistency








predictable growth

How Aetna Will Grow

58


enhancing the core

• Excellent Group Medicare Advantage growth prospects • Group conversion opportunities • Coventry enhances Government business • Medicare Advantage is sustainable • Positioned for Dual Eligible wins



Strong Medicare Growth Trajectory

59

CAGR

2009-2013P: 8.4% 2011-2013P: 19.5%

Revenue (in billions)

$5.8 $6.0 $5.6

~$6.2

~$8.0

2009 2010 2011 2012E 2013P

Aetna expects growth in Medicare to continue


Well-Diversified Medicare Portfolio

60

Individual Medicare Advantage

Group Medicare Advantage

Medicare Supplement

Prescription Drug Plans

• 137k members • Reinvigorated

effort to grow Individual MA in 2013

• Leading franchise with over 300k members

• 1.2 million member conversion opportunity

• TRS drives $1 billion in projected revenue in 2013

• Over 470k members

• Able to receive auto-assigned members in 2013

• Genworth acquisition integrated

• Over 200k members, grown 23% since acquisition

Aetna’s Medicare franchise is positioned for strong growth

• Coventry adds 250k members and growing

• Top 5 PDP plan pro-forma for Coventry

Membership data as of September 30, 2012


Medicare Advantage Sustainability

61

Aetna believes target Medicare margins and the value proposition to the customer are sustainable

Parity with fee for service rates

Minimum MLR requirements

Health Insurer Fee

Medical management

and plan design

Provider collaboration

impacts

Star bonuses

+ -


Medicare Outlook

62

Commercial ASC

Large Group Insured

• Strong revenue growth driven by increased membership

• Higher MBR in 2013 due to crediting experience back to customers

• Target margins and the value proposition to the customer are sustainable

• Group conversion opportunity from commercial book of business

• Coventry enhances Individual Medicare Advantage business


Proven Medicaid Growth

63

Aetna is well positioned to continue to grow Medicaid

847

~1,250

2012E membership will have increased by 1.5x since 2008

2008 2012E

Medicaid Membership Lives in 000s

$0.8

~$1.9

2008 2012E

Medicaid Revenue $ in Billions

10% CAGR

2012E Revenues will have increased by 2.3x since 2008

23% CAGR


Aetna’s Medicaid Footprint

64

A leading Managed Medicaid provider

Over 1.25 million members served

Coventry will add ~900k

members and 4 new states – over $4.5 billion in 2012 PF

Medicaid revenues

Integrated medical, behavioral and pharmacy capabilities

Aetna’s footprint, capabilities and experience position us well to serve high acuity populations

Footprint states

2012 expansions

2013 Dual Eligible expansions

Additional Coventry States


Arizona Mercy Care: Dual Eligible Case Study

65

Inpatient Hospital Days

Length of Stay

Re-admission Rate

Emergency Visits

19% lower than unmanaged

Medicare

21% lower than unmanaged

Medicare

43% fewer than unmanaged

Medicare

Aetna has both the capabilities and the experience to manage high acuity populations to better outcomes at lower costs

9% fewer than unmanaged

Medicare


Dual Eligible Expansions

66

Scored 1st or 2nd in 6 of 7 regions

Implementation expected in 2013

Aetna selected to operate in the Southwest, Central and Northwest regions

Recent wins are a testament to Aetna’s capabilities

One of six providers selected

136,000 members in total

$3.2 billion in total revenue

OH

IL


Medicaid Outlook

67

Commercial ASC

Large Group Insured

• Medicaid is one of the top three budget items on stressed State budgets

• Less than half of Medicaid enrollees are part of a Medicaid Managed Care Organization*

• The ACA is expected to further increase Medicaid enrollment in 2014

• Aetna has an excellent footprint of Medicaid states, which will increase following the Coventry acquisition

• We have the all the assets we need to be successful in Medicaid and are determined to win our fair share of new opportunities

* Source: CMS Medicaid Enrollment Report, July 1, 2011.







predictable growth

How Aetna Will Grow

68


enhancing the core

• Well-positioned to participate on and off exchange • Limited profit exposure to Small Group and Individual • Upside potential if exchanges are successful • Coventry enhances our footprint and opportunity



Potential Impact of Reform

Individual could grow by 26% over the next 3 years

1 2

National Membership (M)

Large Group

Individual

Medicare

Medicaid

Uninsured

2015P

326

2012E

316

Small Group

CAGR (14%)

6%

3%

(3%) 26%

1%

49 32

55 65

55 50

36 33

15 30

111 112

The changing Individual marketplace represents an opportunity for Aetna

Source: Aetna projection based on various industry models and forecasts.


Aetna is Positioned to Succeed in Exchanges

70

*As of September 30, 2011

Aetna believes it can capture its fair share of the public exchange opportunity

Convenient Guided shopping Easy to use products Information technology

Right Products Cost competitive Low-cost networks Strong brand

Right Geographies Expect to participate in geographies that represent ~50% of the individual marketplace


Individual and Small Group Contribution

71

Small Group

6%

Aetna has limited exposure to Small Group and Individual, but has option value given its geographic reach

Individual 1%

Small Group Individual

Membership 1.0M 400k

Revenue $4.3B $1.3B

Target Pre-tax Operating Margins

5% to 6% 3% to 4%

Note: Based on FY 2012 estimates. Data is approximate. When calculating Aetna’s EBITDA, allocation of depreciation and amortization expense to the product groups presented above is estimated.

2012E EBITDA of $3.4 Billion


Small Group and Individual Outlook

72

Commercial ASC

Large Group Insured

• Aetna expects to participate in the Individual exchanges in up to 15 states in 2014

• We will approach exchanges with caution until we are confident they represent a rational and stable marketplace

• After a transition period, if Aetna cannot earn its cost of capital on exchanges, we will exit market areas

• Aetna has limited exposure to Small Group and Individual, but has option value given its geographic reach








predictable growth

How Aetna Will Grow

73

• Aetna’s ACS strategy is driving the next generation of payer / provider collaboration

• Our value proposition is compelling for Aetna, our provider partners and members

• Low-cost model is driving member growth across Aetna’s businesses


enhancing the core


The Spectrum of Provider Collaboration

74

Patient centered medical homes

Provider collaborations


• Best practice sharing

• Care management support

• Incentive payments to PCPs

• Embedded case managers

• Clinical protocol adherence

• Pay for performance structure

• Integrated technology and care management

• New product launches

• Aligned incentives and true risk sharing

Aetna’s Accountable Care Solutions are an advanced form of provider collaboration and risk sharing


ACS Value Proposition

75

Provider partners

Members and

employers

Aetna

• Membership growth • Improved unit cost position • Reduced earnings volatility • Fee revenue

• Higher engagement and quality

• Lower premiums and out-of-pocket costs

• Improved health and productivity

• New shared savings margin opportunity

• Reduced cost shift pressure

• Improved revenue diversification

• Increased volume

ACOs advance the Triple Aim and benefit all of the constituents in the health care value chain


Aetna’s Accountable Care Solutions Goals

76





Aetna’s Accountable Care Solutions are focused on growing membership in our core


Aetna Accountable Care Solutions Membership Breakout

77

Market data based on Aetna estimates of 2011 Medical Members in each category. Membership in millions. Excludes international and network rental members.

Aetna’s Accountable Care Solutions business can deliver growth across the spectrum of managed lives

Seeing strong 2012 business growth

Building core infrastructure for sustainability

Following a successful foundational year, forecasting significant growth in 2013

Other Commercial

Commercial ASC

48% 48%

4%

30%

39%

18%

4%

Hospital Employees

Medicaid

Other Commercial ASC

Medicare

Commercial Insured

9%

~125k members

2012E


Aetna Accountable Care Solutions Revenue Breakout

78

Market data based on Aetna estimates of 2011 Medical Members in each category. Membership in millions. Excludes international and network rental members.

Aetna’s Accountable Care Solutions business can deliver growth across the spectrum of managed lives

Seeing strong 2012 business growth

Building core infrastructure for sustainability

Following a successful foundational year, forecasting significant growth in 2013

Other Commercial

Commercial ASC

48% 48%

4%

30%

39%

18%

4%

Hospital Employees

Medicaid


Medicare

Commercial Insured

9%

125k members

2012E

58% 31%

4% 4%

~$150M of

Revenue 2012E

Hospital Employees

Medicaid%


Medicare

Commercial Insured

3%


Converted or Attributed ACS Membership

• Existing Aetna members converted to an ACS product or network

• Includes TRS, where ACOs and Medicare provider collaborations were key to winning the bid

New ACS Membership

• New Aetna members from ACS product launches

• Expect to add 75k new members in 2013, across multiple lines of business

Accountable Care Solutions Membership

70

145 55

230

2012E 2013P

125

375 Medical

Members in 000s

Aetna’s ACS membership is projected to triple in 2013


Accountable Care Solutions Projections

15 30

60

2012E 2013P 2014P

125

375

750

2012E 2013P 2014P

$1.5

$2.5

2012E 2013P 2014P 2015P

$0.15

Partnerships Membership (000s) Revenues ($B)

Aetna expects the momentum in ACS to continue to ramp over the next several years




enhancing the core




predictable growth

How Aetna Will Grow

81

• Strategically compelling • Financially attractive • Enhances diversification • Manageable execution risk




Coventry Transaction

82

Responsibly shifts our mix towards higher growth government programs

Enhances our local presence in key geographies

Adds high cash flow non-regulated fee-based businesses

Excellent financial returns – Operating EPS accretion, ROIC, ROE

The Coventry acquisition will strengthen Aetna’s core and position us for growth

Note: Combined Aetna + Coventry metrics are estimated combined for 2012.

54%

21%

10%

15%

$50B in 2012E

Revenues

ASC and Other

Medicaid

Medicare

Commercial Risk

+


Coventry Acquisition is Consistent with Aetna’s Strategy

• Adds nearly 4 million medical members

• Adds 1.5 million PDP members

• Fourth largest combined Medicare Advantage, PDP and Medicaid player

• Low-cost platforms

• Value-based networks

• Local provider relationships

• Provider relationships enhance Aetna’s ACS pipeline

• 2012P PF Parent Cash Flow of ~$2.4 billion

• Double digit ROIC projected in 2015

• High teens ROE projected in 2015

83

Coventry enhances all elements of Aetna’s growth strategy * Pro forma 2012E, amongst publically-traded peers.

Advancing The Core* Emerging Businesses Deploying Capital*


Key Steps for a Successful Integration

84

Signing to Closing

• Engage integration teams

• Identification of duplicative functions

• Best practices benchmarking

• In-depth functional assessments

Year 1

• Focus on realizing initial SG&A synergies

• Elimination of public company costs

• Application of best practices

Year 2

• Additional SG&A synergies targeted

• Deploy better network discounts across portfolio

• Medical management

Year 3

• Run-rate SG&A synergies

• Continued network synergies realized

• Potential pharmacy synergies

We have already assembled an integration team and are fully engaged in sign to close integration planning


Aetna is Preparing to Close in Mid-2013

85

Coventry Stockholder Vote

State Regulatory Filings

Department of Justice

• Transaction approved by Coventry stockholders on November 21st

• All major filings complete

• Regulatory approval process underway

• 6 out of 21 State change of control approvals received*

• Second request received

• Continue to work with the Department of Justice to respond to their questions

Aetna continues to believe that the regulatory issues in acquiring Coventry are manageable

*As of 12/7/12.


How Aetna Will Grow

86


predictable growth




enhancing the core




Q&A Core Business Moderator: Tom Cowhey Panelists: Kristi Matus, Frank McCauley, Karen Rohan


Kristi Matus Karen Rohan Frank McCauley

Q&A: Core Business

Government Services Commercial Businesses Coventry Integration, Specialty Businesses

Panelists

Representing

Moderator

Tom Cowhey Investor Relations

Charles Kennedy CEO, Accountable Care Solutions

Gary Thomas COO, Accountable Care Solutions



Agenda

Market Dynamics and the Aetna Solution

Financial Implications

Q&A

90


Today’s Objectives

• Explain why Accountable Care is the model of the future for providers and Aetna

• Explain why Aetna’s solution is differentiated and highlight our progress

• Explain how the business model works

• Describe how ACS supports growth in our core businesses

• Explain how Aetna can benefit from other payer populations

91


Providers need a new business model for financial sustainability

92

Private payers are Hospitals’ most profitable business…

…And they are a shrinking part of Hospital revenues

Medicare

Medicaid

Private Payer

70%

80%

90%

100%

110%

120%

130%

140%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Aggregate Hospital Payment-to-cost Ratios

42%

35%

10% 6%

5% 3%

39% 38%

13%

1%

6% 3%

35% 39%

16%

2% 6% 2%

Private Payer Medicare Medicaid Other Government Uncompensated Care Non-patient

Distribution of Hospital Cost by Payer Type (% of Total Cost) - 1980 / 1990 / 2010

Breakeven

Source: Avalere Health analysis of American Hospital Association Annual Survey data, 2010


Changing the emphasis from volume to value

93

Encourages additional capacity and unnecessary care

Payers and providers as adversaries

Volume Value

Provider revenues contingent on volume of services

Denied claims, un-reimbursed admissions and other penalties as payers manage utilization

Re-aligned financial incentives create diversified revenue sources through shared savings

Improved cost structure and efficiency increases profitability

Quality improvement increases performance-based reimbursement

Aligned incentives to provide appropriate care in the best setting

ACOs are about enabling population management


Aetna’s Industry-Leading Tools and Services

MOBILE CONNECTIVITY

CONSUMER ENGAGEMENT

HEALTH INFORMATION EXCHANGE

DISTRIBUTED APPLICATIONS

Our diverse suite of tools and services enable the ACO model and make Aetna a partner of choice

CLINICAL DECISION SUPPORT & WORKFLOW MANAGEMENT

HEALTH PLAN PRODUCTS AND

SERVICES

94


Aetna’s accountable care activity

95

Aetna’s Accountable Care activity covers 60% of the U.S. Population

Contracted ACO

ACO Pipeline


Aetna’s Provider Collaboration Successes

96

Patient centered medical homes

Provider collaborations


Aetna is executing across the spectrum of Provider Collaboration

15

30

Signed deals

Letters of intent

200+ Providers in pipeline

20

85

Multi-payer 7

Single-payer

Medicaid

65 Medicare Provider Collaborations


Agenda



Q&A

97


Changing the model to alleviate provider pressures

98

Today (3-5%

Operating Margin)

Impact from Rate Pressures

(Negative margin within

3-5 years) Unnecessary

Utilization Reduction

Shared Savings

New Growth (i.e., covered

lives) Operating Cost

Improvements

Current Model Accountable Care Model

Aetna’s solutions offer delivery systems a path to sustainable profitability


Aetna’s Accountable Care Solutions Goals

99





Aetna’s Accountable Care Solutions are focused on growing membership in our core


Converted or Attributed ACS Membership

• Existing Aetna members converted to an ACS product or network

• Includes TRS, where ACOs and Medicare provider collaborations were key to winning the bid

New ACS Membership

• New Aetna members from ACS product launches

• Expect to add 75k new members in 2013, across multiple lines of business

Accountable Care Solutions Membership

70

145 55

230

2012E 2013P

125

375 Medical

Members in 000s

Aetna’s ACS membership is projected to triple in 2013


Our ACS Model Reduces Variability and Incents Aligned Behavior

101

Install population management tools

Reduce medical costs by 10% or more

Aetna and providers share risk around a medical cost target

for a defined population

Benefits

Aetna markets and sells insured products at lower price points

Providers share in upside and downside on medical cost target

As population management savings improve, can increase physician fee schedules

Narrow network products increase provider volumes


Accountable Care Solutions Risk Sharing Example

102

Medical Costs Higher Base Case Medical Costs

Lower

Pre-ACO Medical Costs $300

ACO Medical Costs $280 $270 $260

Risk Share: 50/50 ($5) - $5

Pre-tax Profit $25 $30 $35

Comments

• Provider shares down-side risk

• Higher volumes drive higher profit

• Aligned incentives can drive improved outcomes over base case

Illustrative PMPMs shown

Risk sharing model incents aligned behavior and reduces variability

10% reduction in medical costs


Representative ACS Partners and Product Launches

103

Large Group

Small Group Individual Medicare Medicaid

In conjunction with our ACS Partners, Aetna has launched almost 100 new products

http://www.inova.org/


Aetna Can Also Benefit from Serving Non-Aetna Patients

104

Self-Insured Plan Sponsors

Medicare Shared Savings Program participants

Other Managed Care Organizations

Other Payer Populations Aetna technologies and care management produce cost

savings

Aetna receives fees and gain share on savings

Aetna downside limited to fees

Fee revenues from Patients Under Management is not projected to be meaningful to Aetna consolidated results in 2013


Agenda



Q&A

105


Questions?

Financial Outlook and Capital Plan Joe Zubretsky Senior Executive Vice President and Chief Financial Officer


Agenda

2012 Update and 2013 Outlook

Capital Generation and Deployment

Long-Term Growth

108


Medicare will be the Primary Driver of 2013P Membership Growth

109

Aetna projects Medical Membership growth in 2013

Membership 2013 Commentary

2012 Projection ~18.2M

Commercial ASC ~(90K) • Primarily from TRS conversion

Commercial Insured ~(50K) • International growth offset by other business lines

Medicare ~175K • 130K MA membership growth led by TRS conversion of 85K members

Medicaid Flat • Revenue growth from 2012 expansions and duals contract wins

1Q 2013 Projection ~18.2M • Flat membership in 1Q13

2Q-4Q 2013 Growth 200k • Commercial ASC, Commercial Insured and Medicare

YE 2013 Projection ~18.4M • Projecting 200k growth by year-end 2013


Aetna’s Revenue Growth Will Accelerate in 2013(2)

110

2012E 2013P

TRS Medicare conversion

Other Medicare membership growth

Premium yields in Commercial Insured

Dual eligible wins

Fee yields in Commercial

~6%

~9%

Aetna projects another strong year of revenue growth, which will improve our operating expense leverage


Aetna’s Business is Priced to Reflect Projected Medical Trend and Appropriate Margins

111

Experience rated nature of our Large Group accounts will drive 2013 margins toward targeted levels

3Q12 YTD

2012 Guidance

2013 Guidance Comments

Commercial 80.4% 81.0% – 81.5% 81.5% +/- 50bp Experience rated

margin pressure in large group

Medicare 83.3% Mid 80’s%

Mid to high 80’s%

Experience rated margin pressure could result in 300-400 bps of MBR deterioration

Medicaid 89.6% - High 80’s% Consistent with 2012 results


The Key to Operating Margins is Pricing for Medical Cost Trends

112

Trend Components 2013 Guidance (as of December 12th 2012)

Inpatient (25%) Mid-to-high single digits

Outpatient (15%) High-single digits

Physician (25%) Mid-single digits

Pharmacy (15%) Mid-to-high single digits

2012E 2013P

4.5% - 5.0%

1.5% - 2.0%

4.5% - 5.0%

1.5% - 2.0%

6.5% +/- 50bps 6.5% +/- 50bps

Aetna projects that increased underlying utilization in 2013 will be offset by increased buy-downs and

the absence of leap year impacts

Unit Cost

Utilization


Revenue Mix and Productivity Projected to Lower Aetna’s Operating Expense Ratio(5)

113

19.8%

~19.0%

2011 2012E Inflation ProductMix

Productivityand Other

2013P

~0.5%

~0.7%

~0.6%

18-18.5%

Product mix and productivity in 2013 are projected to more than offset inflation and investment spending


Aetna Expects to Maintain High Single Digit Operating Margins in 2013(3)

114

8.5% - 9.0%

2012E IncreasedMedicare Mix

ExperienceRated Margin

Pressure

SG&ALeverage

OtherImpacts

2013P

8.0% +/- 25 bps

(0.7)%

Shifting government services mix and experience rated margin pressure are projected to lower operating margins in 2013

(0.1%)

(0.9)%

0.8%


Aetna’s Pricing Discipline is Demonstrated in its Margin Profile

10.3%

6.4% 8.0%

10.2% 8.5 to 9.0%

8.0% ±

25 bps

2008 2009 2010 2011 2012E 2013P

Pre-tax Operating Margins(3)

115

Average= 8.6%*

Aetna’s Operating Margins are consistently amongst the highest in the Managed Care Sector

* Using midpoint of guidance for 2012E and 2013P.


Sound Investment Strategy

116

Average credit quality of fixed income portfolio of A

Average duration of 5.9 years

Ability to hold assets to maturity

Diversified mortgage portfolio with 66% average loan to value

Sound risk management principles

Disciplined risk management and asset / liability matching preserve capital and maximize returns

Other 2% Alternative Investments

Mortgage Loans

Fixed Income Securities

~$22B Invested Assets

Cash 5%

79%

8%

6%


Aetna’s Margin Profile has Generated Strong Returns

117

2010 2011 2012E 2013 Guidance

Pre-tax Operating Margin(3)

8% 10% 8.5% – 9.0% 8% +/- 25bp

Return on Capital(4) 11% 14% 12% 12%*

Return on Equity(4) 14% 18% 15% 15%*

Aetna’s Average Returns on Equity over the last five years are higher than the public MCO peer average

* Excludes impact of Coventry financing.


2013 Operating EPS Outlook

118

Aetna projects flat operating earnings in 2013, with operating EPS growth driven by excess capital deployment

2012 Guidance ~$5.10

Net Investment Income ($0.12)

2011 Acquisitions $0.12

Health Care Reform Fees and Taxes $0.15

Share Repurchases $0.30

Other Impacts ($0.15)

2013 Guidance at least $5.40

• Prudent estimate of trend / yield spread

• Favorable experience credited to experience-rated accounts, including Group Medicare

• Higher operating expense

Operating EPS Bridge(1)


2012 and 2013 Guidance Summary Operating Metric 2012 Guidance

as of December 12, 2012 2013 Guidance as of December 12, 2012

Operating EPS(1) ~$5.10

At least $5.40

Operating Earnings(1) ~$1.75 billion ~$1.75 billion

Medical Membership ~18.2 million ~18.2M at 1Q 2013; ~18.4M at year-end 2013

Revenue(2) ~$35.5 billion Increased ~9% compared to 2012

Medical Benefit Ratios: Commercial Medicare Medicaid

81% to 81.5%

Mid 80%’s N/A

81.5% ± 50bps

Mid to high 80%’s High 80%’s

Commercial Medical Cost Trend 6.5% ± 50bps 6.5% ± 50bps

Premium Yield Pricing to an appropriate margin to reflect underlying medical cost trend

Pricing to an appropriate margin to reflect underlying medical cost trend

Business Segment Operating Expense Ratio(5) ~19.0% 18.0% – 18.5%

Pre-Tax Operating Margin(3) 8.5% to 9.0% 8.0% +/- 25 bps

Operating Cash Flow Net Dividends from Subsidiaries Excess Cash Flow to the Parent(6)

Greater than 2012 operating earnings(1)

~$2.0 billion ~$1.4 billion

Greater than 2013 operating earnings(1)

~$1.1 billion ~$0.5 billion

Weighted-Average Diluted Shares ~344M – 347M ~328 million

Debt-to-Total Capitalization Ratio(7) ~38% ~38%

Note: Guidance does not include the impact of the Coventry transaction.

119


Agenda



Long-Term Growth

120


Aetna Has a Track Record of Capital Generation and Management

121

Shareholder dividend

Invest in organic growth

Disciplined M&A

Share repurchases

Demonstrates confidence in strategy and cash flows

Committed to deploy over $9 billion of capital in the last 2 years

Repurchased 33%* of outstanding shares over the last 5 years

25%+ return on incremental capital

Innovation Released ~$450 million through three Vitality reinsurance transactions

*Net of shares issued during the period of 9/30/07 through 9/30/12.


Returning Cash: Aetna’s Shareholder Dividend

122

* Declaration and payment of future dividends is at the discretion of Aetna’s Board of Directors and may be adjusted as business needs or market conditions change.

Our dividend increase reflects continued confidence in our strategy, financial profile and strong cash flow generation capabilities

When Established 2011 2012 2013P

Quarterly Dividend* $0.15 $0.15 $0.175 $0.20

Dividend Yield ~1.75% ~1.5% ~1.6% ~1.8%

Payout Ratio ~15% ~12% ~14% ~15%


Strong Return Profile Business Model

123

2010 2011 2012E

Return on Statutory Capital

The best use of excess capital is to grow organically at target operating margins

24%

30% 29%

Average= 28%


Aetna remains focused on acquisitions that strengthen and grow the core business

Prudent Acquisition Strategy

124

Accretive relative to share repurchases over time

Accelerates growth in the core business

Return on Invested Capital Net present value of cash flows

Internal rate of return Investment payback period

We evaluate potential acquisitions which meet our strategic objectives against stringent financial criteria

Primary Financial Criteria Other Financial Criteria


Acquisition Track Record

125

Genworth Medicare Supplement

2011 Acquisitions

2012 Proposed Acquisition

$7.5 billion in committed capital*

Mid-2013 projected closing

$1.6 billion in expended capital

Fully integrated

On track to deliver additional accretion in 2013

*Excludes transaction expenses. Subject to change based on Aetna’s share price and changes in CVH’s number of shares outstanding.

http://www.payflex.com/


Strengthening the Core and Positioning for Growth

• Pro Forma 2012E Revenues of $50B, EBITDA of over $4.3B and Parent Cash flow of $2.4B

• Project $0.45 of Operating EPS accretion in 2014 and $0.90 in 2015

• Project $400 million of synergies in 2015

• Project double-digit Returns on Capital and high teens Returns on Equity

126

Note: Transaction and Integration costs are excluded from Operating EPS impacts in all periods.

Coventry acquisition is financially attractive for shareholders


Financial Impact

127

Note: Estimates based on current projections. Transaction and Integration costs are excluded from Operating EPS impacts in all periods. Synergies, transaction costs and integration costs are pre-tax. See notes at end of presentation for additional disclosures on financial metrics.

2012E 2013P 2015P 2014P

Operating EPS Impact

No Change to Guidance

Modestly Accretive $0.45 $0.90

Synergies Modest Increasing $400 million per year

Transaction-related Expenses

Up to $50 million $70 million

Integration Expenses $250 to $300 million between 2013P and 2015P

Transaction and Integration Expense

Impact Transaction and Integration expenses excluded from Operating Earnings in all periods

Operating EPS Impact including Integration

Expenses

Slightly Accretive

Increasingly Accretive

Highly Accretive


Synergy Breakdown

128

Other Savings ~15%

Corporate Overlap

~33%

IT Rationalization

~20%

Fixed Cost Leverage

~33%

Synergy value is projected to build over time, and reach $400 million pre-tax in 2015

Rationalize duplicative corporate and administrative

functions

~1 million additional members should improve

the Operating Expense ratio by ~50bps,

at constant mix

Modest medical management, PBM and

provider network savings

Streamline platforms and infrastructure on

combined $1.5 billion of spending


Other Potential Synergies

Coventry PBM Contract Expiration:

– 2016: Medicare

– 2017: Commercial

~$15 billion in combined pharmacy spend

129

Potential to enhance CVH’s capital management over time

Enhanced growth through use of the Aetna brand

Cross-sell potential for specialty products

Aetna’s accretion estimates only include cost synergies

PBM Synergies

Revenue Synergies

Capital Synergies


Coventry Transaction Sources and Uses of Funds

130

Sources ($B)

Uses ($B)

Available Cash $1.2

New Debt and Commercial Paper 2.5

Target Debt Assumed 1.6

New Shares Issued (52M shares) 2.2

Total Sources $7.5

Purchase Equity $5.9

Target Debt Assumed 1.6

Total Uses $7.5

The average interest rate on Aetna’s transaction debt is approximately 2.3%

Note: Excludes transaction expenses. Subject to change based on Aetna’s share price and changes in CVH’s number of shares outstanding. Book value of debt shown.


Coventry Transaction Pro-Forma Capital Structure

131

We remain confident in the strength of Aetna’s balance sheet and cash flows

Note: All figures are as of September 30, 2012

Cash Flows

Debt-to-total Capitalization Ratio

Risk Based Capital

Credit Ratings

2012 pro forma EBITDA of $4.3B 2012 pro forma Parent Cash Flow of $2.4B

Expected to be ~40% at closing Projected to return to ~35% over two years

Pro Forma RBC Ratio of ~285% of Company Action Level (CAL) Long-term target of 275% of CAL post-closing

Maintain solid investment grade ratings


2013: Strong Capital Generation Continues

132

~$1,750

($350)

$2,000 $150

$450

Operating Earnings

Strategic Transaction

Working Capital

Management

Higher Membership

Net Subsidiary Dividends

ProjectedOperatingEarnings

HigherMembership

NetSubsidiaryDividends

2012 E 2013 P

Net subsidiary dividends are expected to decline in 2013 as more capital is retained for growth

Dol

lars

in m

illio

ns ~$1,750

$1,100

($650)

Aetna’s highly successful

Vitality program

25%+ return on incremental

capital

(1)

(1)



133

Projecting to repurchase ~$1.4 billion of shares in 2012

2012 Guidance

2013 Guidance

Beginning Liquidity $100M ~$2,400M

Net Subsidiary Dividends ~2,000 ~1,100

Coventry Acquisition Debt ~2,000 ~500

Projected Share Repurchases (~1,400) (~500)

Shareholder Dividends (~240) (~260)

Interest Expense (~165) (~215)

Other ~105 (~75)

Ending Liquidity ~$2,400M ~$2,950M

Reserved for Coventry Funding ~2,300 ~2,850

Core Liquidity ~100 ~100


Agenda



Long-Term Growth

134


Strong Operating and Cash EPS Growth

135

$3.68

$5.40

2010 2013P

13.6% CAGR

$3.82

$5.66

2010 2013P

14.0% CAGR

Operating EPS(1) Cash Operating EPS(1)

Aetna expects to exceed its Long-term Operating EPS growth target from 2010 to 2013P


2014 and the Post-Reform Landscape

136

Industry Fees & Taxes • Aetna will incorporate reform related

fees and taxes into product pricing

• Aetna doesn’t expect meaningful shifts from Large Group Insured to ASC

Exchanges • While early exchange experience is

uncertain, ultimately expect a rational market to emerge

• Presents a larger opportunity than risk given Aetna’s current exposure

Medicare Advantage • Expect margin sustainability

• Will continue to be a growth driver for Aetna

• Minimum MLR requirements are expected to be manageable

Medicaid Expansion • Aetna expects to capture its fair share of

market expansion opportunity

• Positioned well for Dual Eligible growth


Long-Term Growth Illustration

137

Emerging Business Growth

Core Business Growth + Capital

Deployment = Long-Term Growth Rate +

• Medicare growth • Commercial

membership growth • State Government

opportunities

• ACS, International, and HIT

• High growth, cash generating businesses

• Currently small relative to core

• Deploying capital to enhance total shareholder return

• Reinvest in the business

• Disciplined M&A

• Share repurchases

• Low double-digit Operating EPS growth target on average over time

We believe low double-digit Operating EPS growth on average over time is achievable

4%+ Enhances Core 6%+ 10%+

Mark Bertolini Chairman, Chief Executive Officer and President

Joe Zubretsky Senior Executive Vice President and Chief Financial Officer

Q&A


Questions?

Conclusion Mark Bertolini Chairman, Chief Executive Officer and President


The External Environment Influences Aetna’s Strategy

141


Consumer Engagement


Coventry Acquisition

Unsustainable health cost

growth

Increased consumer involvement

Provider consolidation

Health information technology

Inefficiency is adding to health

care costs

Aetna’s strategic pillars address changing marketplace needs

Aetna’s strategic pillars


How Aetna Will Grow

142


predictable growth

Large group business can

profitably grow



enhancing the core





Aetna’s Shareholder Value Creation Model

143

Advance the core business 4%+ Growth

Emerging business growth Enhances core

Deploy capital effectively 6%+ Growth

• Shareholder dividend • Invest in organic growth • Disciplined M&A • Share repurchases

• Effective health care networks

• Affordable products

• Transform the network model

• Engage consumers

Target low double-digit Operating EPS growth on average

over time


Why Invest in Aetna?

144

Results

Strategy

Growth

Aetna’s differentiated strategy can create competitive advantages and drive profitable

growth

Aetna’s well-positioned and diversified portfolio can produce superior

results

Aetna’s 2010-2013P Operating EPS CAGR of 13.6%* is higher than any of its diversified MCO peers

Aetna targets low double- digit Operating EPS growth on average over time

*Source Thomson Reuters and Company Guidance.


Footnotes

145

1) Operating earnings, operating earnings per share, projected operating earnings and projected operating earnings per share exclude from net income net realized capital gains of $50.7 million ($77.6 million pretax) reported by Aetna for the nine months ended September 30, 2012, and the loss on early extinguishment of long-term debt of $23.0 million ($35.4 million pretax), and transaction-related costs related to the proposed Coventry acquisition of $12.5 million ($13.8 million pretax), reported by Aetna for the three and nine months ended September 30, 2012. Projected operating earnings and projected operating earnings per share also exclude from net income any future net realized capital gains or losses, a projected after-tax charge to net income of approximately $78 million ($120 million pretax) related to the proposed settlement of certain class action litigation, which will be recorded in the fourth quarter of 2012, and any additional other items that neither relate to the ordinary course of our business nor reflect our underlying business performance. Aetna is not able to project the amount of future net realized capital gains or losses or any such other items (other than projected transaction and integration-related costs related to the proposed Coventry acquisition and the projected charge related to the proposed litigation settlement), and therefore cannot reconcile projected operating earnings to projected net income or projected operating earnings per share to projected net income per share in any period. Although the excluded items may recur, management believes that operating earnings and operating earnings per share provide a more useful comparison of Aetna’s underlying business performance from period to period. Net realized capital gains and losses arise from various types of transactions, primarily in the course of managing a portfolio of assets that support the payment of liabilities. However, these transactions do not directly relate to the underwriting or servicing of products for customers and are not directly related to the core performance of Aetna’s business operations. In addition, management uses operating earnings to assess business performance and to make decisions regarding Aetna’s operations and allocation of resources among Aetna’s businesses. Operating earnings is also the measure reported to the Chief Executive Officer for these purposes.

Below is a reconciliation of Aetna’s operating earnings to net income (8) for each of the years ended December 31, 2011 through 2009 and Aetna’s operating earnings, excluding amortization of other acquired intangibles assets to net income (Cash Operating EPS) for the year ended December 31, 2010:

(Millions) 2011 2010 2009Operating earnings, excluding amortization of 2,044.2$ 1,617.3$ 1,301.1$

of other acquired intangible assets, net of taxLess: Amortization of other acquired intangible assets, net of tax 78.5 61.9 63.2$

Operating earnings 1,965.7$ 1,555.4 1,237.9$ Voluntary early retirement program, net of tax (89.1) - - Transaction-related costs, net of tax - (43.1) Litigation-related insurance proceeds, net of tax - 101.5 24.9 Severance and facil ities charge, net of tax - (30.8) (60.9) ESI settlement, net of tax - - 19.6 Net realized capital gains, net of tax 109.1 183.8 55.0

Net Income (GAAP measure) 1,985.7$ 1,766.8$ 1,276.5$

Weighted average common shares - diluted 380.2 422.9 449.5

Operating earnings , excluding amortization of acquired intangible assets (Cash operating EPS) 5.38$ 3.82$ 2.89$

Operating earnings per share 5.17$ 3.68 2.75$ Net income per share (GAAP measure) 5.22 4.18 2.84

For the Year Ended December 31,


Footnotes (Continued)

146

2) Revenue and projected revenue exclude net realized capital gains of $77.6 million reported by Aetna for the nine months ended September 30, 2012. Projected revenue also excludes any future net realized capital gains or losses and other items, if any, from total revenue. Aetna is not able to project the amount of future net realized capital gains or losses, or any such other items (other than transaction and integration costs related to the Coventry acquisition and the charge related to the proposed litigation settlement) and therefore cannot reconcile projected revenue to projected total revenue in any period.

Below is a reconciliation of Aetna’s total revenue for each of the years ended December 31, 2011 through 2008:

(Millions) 2011 2010 2009 2008Revenue, excluding net realized capital gains (losses) (A) 33,611.9$ 34,018.5$ 34,678.9$ 31,606.6$

ESI settlement - - 30.2 - Net realized capital gains (losses) 167.9 227.5 55.0 (655.9)

Total revenue (GAAP measure) (B) 33,779.8$ 34,246.0$ 34,764.1$ 30,950.7$




147

3) In order to provide useful information regarding Aetna's profitability on a basis comparable to others in the industry without regard to financing decisions, income taxes or amortization of other acquired intangible assets (each of which may vary for reasons not directly related to the performance of the underlying business), Aetna's projected pretax operating margin and pretax operating margin are based on projected operating earnings and operating earnings, respectively, as described in (1), excluding interest expense, income taxes and amortization of other acquired intangible assets. Management also uses pretax operating margin to assess Aetna's performance, including performance versus competitors.

Below is a reconciliation of Aetna’s pretax operating margin (8) for each of the years ended December 31, 2011 through 2008:

(Millions) 2011 2010 2009 2008Reconciliation to Income Before Income Taxes Operating earnings before income taxes, excluding interest expense and amortization

of other acquired intangible assets (C) 3,414.5$ 2,723.8$ 2,212.1$ 3,247.8$ Interest expense (246.9) (254.6) (243.4) (236.4) Amortization of other acquired intangible assets (120.7) (95.2) (97.2) (108.2) Voluntary early retirement program (137.0) - - - Transaction-related costs - (66.2) - - Litigation-related insurance proceeds - 156.3 38.2 - Severance and facil ities charge - (47.4) (93.7) (54.7) ESI settlement - - 30.2 - Contribution for the establishment of an out-of-network pricing database - - - (20.0) Allowance on reinsurance recoverable - - - (42.2) Reduction of reserve for anticipated losses on discontinued products - - - 43.8 Net realized capital gains (losses) 167.9 227.5 55.0 (655.9)

Income before income taxes (GAAP measure) 3,077.8$ 2,644.2$ 1,901.2$ 2,174.2$

Net Income (GAAP Measure) (D) 1,985.7$ 1,766.8$ 1,276.5$ 1,384.1$

Pretax operating margin (C)/(A) 10.2 % 8.0 % 6.4 % 10.3 %After-tax net income margin (GAAP measure) (D)/(B) 5.9 % 5.2 % 3.7 % 4.5 %




148

4) The components of return on capital, return on equity, projected return on capital and projected return on equity, are adjusted for the following:

The net income component excludes net realized capital gains and losses, and other items as described in (1). The net income component of return on capital and projected return on capital also excludes interest expense on our outstanding debt.

The average shareholders’ equity and average capital components of return on capital exclude accumulated other comprehensive income. The average capital component also includes our outstanding debt.

Below is a reconciliation of Aetna’s return on capital and return on equity (8) for the years ended December 31, 2011 and 2010:

(Millions) 2011 2010 2009Operating earnings, excluding interest expense (E) 2,126.2$ 1,720.9$ 1,396.1$ Less interest expense, net of tax (160.5) (165.5) (158.2) Operating earnings (1) (F) 1,965.7$ 1,555.4$ 1,237.9$

2011 2010 2009Shareholders' equity (GAAP Measure) 10,120.2$ 9,890.8$ 9,503.8$ Less: Accumulated other comprehensive loss (1,189.2) (1,162.6) (1,223.0) Adjusted shareholders' equity 11,309.4$ 11,053.4$ 10,726.8$

Short-term debt 425.9$ -$ 480.8$ Current portion of long-term debt - 899.9 - Long-term debt, less current portion 3,977.7 3,482.6 3,639.5 Total debt 4,403.6$ 4,382.5$ 4,120.3$

Average debt (G) 4,393.1$ 4,251.4$ Average shareholders' equity (H) 10,005.5 9,697.3 Average adjusted shareholders' equity (I) 11,181.4 10,890.1

Return on capital (E)/(G+I) 14% 11%Return on capital (GAAP measure) (D)/(G+H) 14% 13%

Return on equity (F)/(I) 18% 14%Return on equity (GAAP measure) (D)/(H) 20% 18%

Year Ended December 31,

Year Ended December 31,



149

5) The projected business segment operating expense ratio (Projected Business Segment Operating SG&A Ratio) and the business segment operating expense ratio are calculated by dividing operating expenses, excluding other items, by revenue, as described in (2), for our business segments, Health Care, Group Insurance and Large Case Pensions. The projected business segment operating expense ratio also excludes projected transaction and integration costs related to the Coventry acquisition and the projected charge related to the proposed litigation settlement. Aetna is not able to project the amount of future net realized capital gains or losses or any such other items (other than the projected transaction and integration related costs related to the Coventry acquisition and the projected charge related to the proposed litigation settlement) and therefore cannot reconcile the projected business segment operating expense ratio to a comparable GAAP measure.

Below is a reconciliation of Aetna’s business segment operating expense ratio for each of the years ended December 31, 2011 through 2009:

6) Excess cash flow available to the parent after payment of estimated fixed charges, shareholder dividends, issuance and/or maturity of debt, and inclusive of estimated available cash from employee stock programs. Excess cash flow excludes cash projected to be used for the completion of the Coventry transaction.

7) Guidance includes the issuance of debt in November 2012 related to the Coventry acquisition. Upon completion of the Coventry transaction, we currently expect that our debt-to-total capitalization ratio will be ~40%.

(Millions) 2011 2010 2009Business segment operating expenses (J) 6,662.5$ 6,431.0$ 6,092.7$

Corporate Financing segment operating expense 4.9 130.7 234.8 Operating expenses, including Corporate Financing 6,667.4 6,561.7 6,327.5

Voluntary early retirement program 137.0 - - Transaction-related costs - 66.2 - Litigation-related insurance proceeds - (156.3) (38.2) Severance and facil ities charge - 47.4 93.7

Total operating expenses (GAAP measure) (K) 6,804.4$ 6,519.0$ 6,383.0$

Business segment operating expense ratio (J)/(A) 19.8 % 18.9 % 17.6 %Total operating expense ratio (GAAP measure) (K)/(B) 20.1 % 19.0 % 18.4 %




150

8) In addition to net realized capital gains, the following other items are excluded from operating earnings because we believe they neither relate to the ordinary course of our business nor reflect our underlying business performance:

• In the third quarter of 2012, we incurred transaction-related costs of $12.5 million ($13.8 million pretax) related to the proposed acquisition of Coventry. Transaction-related costs include $10.0 million of advisory, legal and other professional fees which are not deductible for tax purposes and are reflected in the GAAP Consolidated Statements of Income in general and administrative expenses as well as the cost of the bridge credit agreement, which is reflected in the GAAP Consolidated Statements of Income in interest expense.

• In the third quarter of 2012, we incurred a loss on the early extinguishment of long-term debt of $23.0 million ($35.4 million pretax) related to repurchases of certain of our outstanding senior notes.

• In July 2011, we announced a voluntary early retirement program. In connection with the voluntary early retirement program, we recorded a charge of $89.1 million ($137.0 million pretax) during the third quarter of 2011.

• In the fourth quarter of 2010, we recorded transaction-related costs of $43.1 million ($66.2 million pretax) related to our Pharmacy Benefit Management Subcontract Agreement with CVS Caremark Corporation and the announced acquisition of Medicity Inc.

• Following a Pennsylvania Supreme Court ruling in June 2009, we recorded litigation-related insurance proceeds of $45.5 million ($70 million pretax), $13.0 million ($20.0 million pretax), $26.6 million ($41.0 million), $16.4 million ($25.3 million pretax) and $101.5 million ($156.3 million pretax) for the three months, six months, nine months and year ended December 31, 2010, respectively, and $24.9 million ($38.2 million pretax) in 2009, from our liability insurers related to certain litigation we settled in 2003.

• In 2010, 2009 and 2008, we recorded severance and facilities charges of $30.8 million ($47.4 million pretax), $60.9 million ($93.7 million pretax) and $35.6 million ($54.7 million pretax), respectively. The 2010 severance and facilities charges related to actions taken in 2010 or committed to be taken in 2011. The 2009 severance and facility charge related to actions taken or committed to be taken by the end of first quarter of 2010.

• In 2009, we reached an agreement with Express Scripts, Inc. and one of its subsidiaries (collectively "ESI") to settle certain litigation in which we were the plaintiff. Under the applicable settlement, we received approximately $19.6 million ($30.2 million pretax), net of fees and expenses.

• As a result of our agreement with the New York Attorney General to discontinue the use of Ingenix databases at a future date, in 2008, we committed to contribute $20.0 million to a non-profit organization to help create a new independent database for determining out-of-network reimbursement rates. We made that contribution in October 2009.

• As a result of the liquidation proceedings of Lehman Re Ltd. ("Lehman Re"), a subsidiary of Lehman Brothers Holdings Inc., we recorded an allowance against our reinsurance recoverable from Lehman Re of $27.4 million ($42.2 million pretax) in 2008. This reinsurance is on a closed block of paid-up group whole life insurance business.

• In 1993, we discontinued the sale of our fully guaranteed large case pension products and established a reserve for anticipated future losses on these products, which we review quarterly. Changes in this reserve are recognized when deemed appropriate. We reduced the reserve for anticipated future losses on discontinued products by $28.5 million ($43.8 million pretax) in 2008. We believe excluding any changes to the reserve for anticipated future losses on discontinued products provides more meaningful information as to our continuing products and is consistent with the treatment of the results of operations of these discontinued products, which are credited or charged to the reserve and do not affect our results of operations.

Documents

2012 Investor Conference DECEMBER 12, 2012 - Aetna · 2012-12-12 · 2012 Aetna Investor Conference| December 12, 2012 Aetna Inc. Certain information in this presentation is forward-looking,