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Executives

Jeff Chaffkin - Head of IR

Ron Williams - Chairman and CEO

Joe Zubretsky - EVP and CFO

Mark Bertolini - President and Head of Business Operations

Analysts

Carl McDonald - CIBC World Markets

Matthew Borsch - Goldman Sachs

Scot Fidel - Deutsche Bank

John Rex - Bear Stearns.

Josh Raskin - Lehman Brothers

Peter Costa - FTN Midwest Securities

Justin Lake - UBS

Bill George - J P Morgan

Matt Perry - Wachovia Capital Markets

Christine Arnold - Morgan Stanley

Charles Boorady - Citi

Aetna, Inc. (AET) Q3 2007 Earnings Call October 25, 2007 8:30 AM ET

Operator

Good day and welcome to Aetna's Third Quarter 2007 Earnings Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Jeff Chaffkin. Please go ahead sir.

Jeff Chaffkin

Good morning and thank you for joining Aetna's third quarter 2007 earnings call and webcast. This is Jeff Chaffkin, Head of Investor Relations for Aetna and with me this morning are Aetna’s Chairman and CEO, Ron Williams and Joe Zubretsky, Executive Vice President and Chief Financial Officer. Following their prepared remarks, we will be pleased to respond to your questions.

Joining us for the Q&A portion of this call is Mark Bertolini, President and Head of Business Operations.

During the call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently expected results are described in Aetna's 2006 10-K filed with the SEC.

Pursuant to SEC Regulation G, we have provided reconciliations of metrics relating to the company's performance that are non-GAAP measures in our third quarter 2007 press release, third quarter 2007 financial supplement and our guidance summary. These reconciliations are available on the Investor Information portion of the aetna.com website.

Also, as you know, Regulation FD limits Aetna’s ability to respond to certain inquiries from investors and analysts in non-public forums, so Aetna invites you to ask all questions of a material nature on this call.

Now let me turn the call over to Ron Williams. Ron?

Ron Williams

Good morning. Thank you, Jeff and thanks to all of you for joining us this morning. I am very pleased with Aetna's performance in the third quarter. Earlier this morning, we reported operating earnings per share of $0.97 for the third quarter of 2007. This represents an increase of 15% compared to the third quarter of 2006.

Our success was driven by a number of factors. We delivered solid top line growth, which we achieved through effective execution of our strategy. We had solid underwriting results, which were driven by disciplined pricing actions and favorable medical costs experience, and we continue to achieve operating expense efficiencies while our disciplined capital deployment initiatives continue to yield positive results.

Joe will provide the details of our third quarter results later in the call. What I would like to do is highlight some of our important strategic initiatives from the third quarter. These initiatives are advancing Aetna's efforts to win in the marketplace and position us for long-term profitable growth.

At Aetna, we talk about our strategy in the context of four dimensions; segmentation, integration, consumerism, and operational excellence. First, with regard to segmentation, both at the customer and market level. We constantly are looking for new ways to more effectively serve our different groups of customers, while identifying opportunities in new markets.

As a result of our efforts this quarter, we were able to achieve diversified, organic net medical membership growth of 228,000 members. This brings Aetna’s year-to-date organic net medical membership growth to 562,000 members. And now project full year net medical membership growth of 600,000 to 650,000 members, which exceeds our prior growth expectation of 575,000 to 600,000 members.

Including our acquisition of Schaller Anderson, which closed on July 31, total medical membership at the end of the third quarter has grown to 16.6 million members. During the quarter, we took important steps to execute our segmentation strategy to expand and diversify our business. Specifically, we expanded our individual profit into five additional states as we continue to focus on the 47 million people in America without insurance.

We are creating workable solutions for the different segments of the uninsured population, and Aetna now offers products for individuals and their families in 24 states and Washington D.C. We have very strong membership growth in the third quarter in Aetna’s Government and Labor sector and in the Student Health market, demonstrating the value of our diversified product offerings and distribution capabilities.

Another strategic accomplishment in the area of segmentation was our acquisition of Goodhealth Worldwide, which closed on October 1. Goodhealth Worldwide is a leading managing general underwriter for international private medical insurance covering approximately 56,000 members. Goodhealth offers expatriate benefits to individuals, small and medium size companies and large multinational clients around the world. Broadening Aetna Global Benefits expatriate offerings and significantly enhancing our global capabilities and reach. In addition, this acquisition combines Aetna’s strength in US, [to our] benefits plans with Goodhealth’s deep knowledge on the European benefit designs.

One final segmentation highlight during the quarter was our announcement of the formation of our Military Healthcare Advisory Committee. This committee will help guide as we consider opportunities to grow our business relationships with the federal government, including our potential bid for Department of Defense’s TRICARE health plan. Integration is the next dimension of our strategy. The integration of our products and services delivers a strong value proposition to our customers, which in turns results in new cross sale and revenue growth opportunities.

Increasingly, we are making multiple product sales and in the third quarter we continued to generate membership gains across our specialty products of pharmacy, dental and behavioral health. Pharmacy membership increased by 83,000 in third quarter, commercial dental added 93,000 net new members, and in behavioral health we increased membership by 156,000 members.

The value of integration goes beyond simplified administration. By integrating medical pharmacy, dental and behavioral health along with our industry-leading Active Health medical management capabilities and proprietary technologies, we can help providers favorably impact the clinical outcomes for our members. Aetna’s innovated and unique medical management products continue to attract strong interest and drive profitable growth. In fact, as of September 30th, 15.6 million members are benefiting from Aetna's Active Health care engine.

In addition, our Personal Health Record is resonating in the market. This quarter we announced that as of January 2008 every federal enrollee who selects an Aetna Medical Plan will gain access to our care engine powered Personal Health Record. This type of innovation has enabled Aetna to have the highest percentage membership growth across all federal health plan offerings during the past four years.

Consumerism is another key dimension of our strategy. We continue to advance Aetna's leadership in consumerism by introducing new tools and capabilities and increasing membership and our consumer-directed health plans. For example earlier this month we announced the launch of a new web-based resource that further expands our cost and quality transparency initiative.

Beginning next month Aetna members in certain locations will be able to use our Aetna navigator online tool to review total expected cost for more then 30 common medical procedures. This unique approach will allow consumers to compare total procedure cost by selecting different combination of procedures, physicians and facilities. With all of Aetna’s transparency initiatives our intent to support informed consumer decisions by offering appropriate detail on cost and quality.

We expanded our membership in consumer-directed health plans to a total of 980,000 members at September 30th, which represents growth of 304,000 members year-to-date. Additionally we are on track to expand, excel Aetna’s performance base network to a total of 35 markets effective January 1st 2008, representing 73% of our existing membership.

Operational excellence is the last dimension of our strategy. Operational excellence is embedded in everything we do. The three financial metrics that best demonstrate our operational vigor and accomplishments are the medical benefits ratio, the operating expense ratio, and our pre-tax operating margin. For the third quarter our commercial medical benefit ratio of 78.6% reflects solid underwriting discipline and our focused efforts in the area of medical management. Importantly, we view the medical cost environment is stable and we continue to project our medical cost trend at 7.5% plus or minus 50 basis points for the year

Furthermore, our operating expense efficiency continues to improve. We achieved a 20 basis point decline in our operating expense ratio to 18.2% in the third quarter of 2007 compared to the prior year quarter. We’ve demonstrated consistent progress in reducing our cost as a percentage of revenue even as we continue to make investments to profitably grow our business and enhance our technology infrastructure. The combination of solid underwriting results and operating efficiency lead to a pre-tax operating margin of 12.1% for the quarter, an excellent result demonstrating our commitment to profitable growth.

Now turning to our outlook for the future, I am confident in our ability to continue to deliver top tier performance while successfully meeting customer needs for the balance of 2007 and in 2008. We now project our full year 2007 operating earnings per share to be $3.48, an increase from our prior guidance of $3.40 to $3.42 per share, and now represents 20% growth year-over-year.

In addition although we have not finalized our 2008 plan, and our new business selling season is still underway, we are very optimistic about our growth prospects. While there are competitive challenges in the fee based commercial market, and a constant need to reinvest in the business; we believe our diversified customer segment focus model alone with our capital deployment strategy will enable us to deliver another year of strong profitable growth for Aetna.

For 2008 regarding membership, our momentum continues from our strong 2007 growth. In the government and labor sector, we already have several important wins for 2008. These include the city of Anaheim and the city of El Paso, as well as a large government account which is converting from a self insured to a fully insured Private Fee for Service arrangement.

In National Accounts, we were very successful in winning new business for 2008. For January 1, new business, we expect net additions of at least 200,000 new medical members. And our pipeline includes additional opportunities. Our sales successes include 19 new accounts, growth from existing accounts and opportunities presented to us through the endorsement of the HR Policy Association. The market place feedback we have received has been very positive.

Aetna has set itself apart from the competition by consistently focusing on a best in class customer experience. Providing differentiated consumer oriented products and tools and delivering a truly integrated value proposition.

Overall for 2008 we expect net medical membership growth of at least 300,000 members in the first quarter and expect full year membership growth to be in excess of 650,000 with further upside possible given the strength of our pipeline.

Our guidance for 2008 operating earning per share is $4, consistent with our long term target of 15% growth. This is an early view of 2008 and we look forward to updating you on our fourth quarter call in February.

In summary, I am very pleased with our results for the third quarter, as well as the numerous marketplace surveys that have recently validated our efforts. We are enthusiastic about 2008 and expect another year of profitable growth. I would like to thank our employees across the country and around the world for their unwavering dedication to meeting our customer’s needs. It is through their efforts that we are able to continue our success in 2007 and beyond. Now I will turn the call over to Joe Zubretsky, who will discuss our financial performance for the third quarter and provide additional detail regarding our outlook for the reminder of the year and 2008. Joe.

Joe Zubretsky

Thank you, Ron, and good morning. Earlier this morning, we reported after-tax operating earnings of $507.4 million for the third quarter of 2007 or $0.97 per diluted common share. This compares to $466.3 million or $0.84 per diluted common share in the third quarter of 2006. This represents increases of 9% and 15% respectively. Operating earnings from our three reporting segments totaled $536 million, a 9% increase over the prior year. If you exclude the effects of favorable prior period reserve development, Aetna delivered $0.94 per diluted common share in the third quarter of 2007. That result is $0.02 above the upper end of our guidance range. Aetna’s third quarter results include the impact of the Schaller Anderson acquisition which closed on July 31. This acquisition adds more than $600 million of profitable revenue on an annualized basis.

For the third quarter of 2007 however, Schaller Anderson did not have a material impact on our operating earnings or net income. I will note, with the inclusion of this acquisition impacts operating metrics.

Net income of $496.7 million included $10.7 million of after-tax realized capital losses. This reflected interest rate related market value adjustments on a portion of our investment portfolio which was off set by net gains from securities transactions. Our diluted weighted average share count of 523.9 million shares represents a 6% decrease compared to the prior year quarter due to continued share repurchase activity.

Regarding the operating earnings from our three reporting segments, for the quarter operating earnings in our Health Care segment were $488.6 million, an increase of 9% over the third quarter of 2006 driven by strong underwriting results. Operating earnings in our Group Insurance segment were $38.2 million, 10% higher than the prior year quarter, and the Large Case Pension segment operating earnings were $9.2 million, 13% lower than the third quarter of 2006.

I will organize my comments on third quarter result by the key drivers of our financial performance. First, managing toward target margins; second, investing in profitable growth and third, creating excess capital and deploying it accretively. I will then conclude with our outlook for the remainder of 2007 and 2008.

Let me first address our operating margin performance in the third quarter of 2007 and its key components revenue, health care cost trend, and operating expenses. The combination of solid underwriting results and improved operating efficiency led to an excellent pre-tax operating margin result in the third quarter. The $507.4 million of after-tax operating earnings were $775.9 million on a pre-tax basis represents a pre-tax operating margin on consolidated revenue of 12.1%. This result demonstrates management discipline across all aspects of our business, including pricing rigor, health care cost management and operating expense control.

We continue to deliver on our plans for profitable growth. Our strong top-line growth is a result of solid membership increases, disciplined pricing actions and contributions from acquired businesses.

Consolidated revenues increased 11% in the third quarter, from $6.3 billion in 2006 to $7 billion in 2007, with Health Care segment revenues increasing 12.5% year-over-year or 10.6% if you exclude Schaller Anderson.

Premiums in our Health Care segment increased by 13% year over year, 11.5% excluding Schaller Anderson with our commercial premium increasing by 8.5% and Medicare premiums increasing by 35%.

Specifically, the growth in commercial premiums was driven primarily by disciplined pricing actions, which were in line with the medical costs trend, substantiated by our reported Commercial Medical Benefit Ratio. Weight and volume contributed approximately 6% and 5% in the premium growth offset by mix of approximately 3%.

We continue to reap the benefits of expanding our Medicare footprints with both individual and group Medicare expansion efforts, fueling year-over-year premium growth in that business. Third quarter Medicare advantage membership is 54% higher than the year ago quarter based on membership gains achieved in the first quarter of 2007 capitalizing on Medicare Private-Fee-for-Service opportunities.

Third quarter 2007 consolidated fees and other revenue of $775.9 million increased 9% over the third quarter 2006, 4% if you exclude Schaller Anderson, driven primarily by membership increases and slightly higher per member, per month fees.

Turning to our health care cost experience in the third quarter 2007, Aetna's Commercial Medical Benefit Ratio was 78.6% in the quarter, the same result we produced in the third quarter of 2006. Our Medicare Medical Benefit Ratio was 84.4% in the quarter compared to 80.7% in the year ago quarter. And our total Medical Benefit Ratio, which includes our commercial Medicare and Medicaid products, was 79.4% in the third quarter of 2007 compared to 78.8% in the prior year quarter.

These favorable results reflect our forecasted seasonal pattern of medical utilization as well as our continued ability to maintain pricing in line with medical cost trend.

With respect to our commercial products, it is important to note that in the third quarter of 2006, there were $33 million of favorable prior period development on a pre-tax basis. In relevant year-over-year comparison of the Commercial Medical Benefit Ratio uses 78.6% for this quarter as reported and 79.3% for 2006 as adjusted for the favorable development. Our Commercial Medical Benefit Ratio results demonstrate that we have accurately forecasted medical trend, helped our customers manage it and successfully price for it.

Our Medicare product line is now projected to outperform our previous expectations primarily in the Private Fee-for-Service product. As a result, our operating earnings for this quarter reflect favorable prior period reserve development of $24 million on a pre-tax basis related to the first half of 2007. This accounts for 380 basis points in the Medicare Medical Benefit Ratio and as such the adjusted ratio of 88.2% was in line with our expectations. Our reserving practices remain consistent and appropriate and we ended the quarter with a prudent level of reserves.

Our health care cost reserves stood at $2.2 billion at September 30th. Days claims payable were up 0.9 days to 46.3 days for the quarter and excluding the acquisition of Schaller Anderson our days claims payable were comparable to the second quarter of 2007, and consistent with our expectations.

Our full year view of medical cost trend is that it is stable in consistent with our prior quarter guidance of 7.5% plus or minus 50 basis points. Major health care cost categories continue to be in line with our expectations and we continue to see moderate trends across cost categories. Specifically inpatient costs are trending at mid to high single digit growth rates, outpatient at high single digit to low double digit rates and physician and pharmacy costs at mid single digit growth rates with some upward pressure on pharmacy trend for 2008 due to the impact of fewer new generics coming into the market.

The third key component of our operating margin results is operating expanse efficiency. We continue to realize efficiencies during the quarter and achieved an operating expense ratio of 18.2% representing a 20 basis point improvement compared to the prior year quarter. This improvement comes despite of 20 basis points increase from the Schaller Anderson acquisition due to its service revenue based profile.

We continue to leverage our fixed costs by growing revenue in core markets and products, driving down unit costs with technology and business process improvements, all while investing for future profitable growth through new product platforms, market expansions, and new system capabilities.

Specifically, during 2007 and in the third quarter, we’ve invested in operational platforms related to our HR Policy Association partnership in AARP business, our TRICARE initiative, enhanced disease management programs and Aetna brand awareness.

The second driver of our financial performance is investing for profitable growth. I would like to talk about Aetna’s growth prospects and provide more detail on our third quarter membership growth.

During the quarter, we grow our medical membership organically by 228,000 members with inclusion of Schaller Anderson's approximate 618,000 members, our medical membership were 16.6 million as of September 30. Our segmentation, expansion and diversification strategies continued to gain traction and contribute to our profitable growth.

For example, we achieved strong growth in both insured and self-insured membership during the quarter. Of the 228,000 members we added organically, 133,000 were insured members and 95,000 were self-insured or ASC members.

We continue to expand in attractive growth markets in the third quarter and experienced organic medical membership growth in each of our six regions. Our growth in the West and North-central regions was particularly strong. We also realized meaningful growth from our key and select account customer markets and our individual markets.

The Government, Labor and Student Health markets contribute over 50% of our net organic medical member growth in the third quarter. Our Student Health market added 43 new accounts, achieved retention rates of 95% and had sales successes including the Arizona State University system and the [Ruckers] account, New Jersey which provided accident only coverage to 37,000 full time students

The third and final area of financial performance I‘ll comment on, is our management of capital and its accretive deployment. This includes our cash flow dynamics, our holding company liquidity, how we deploy that liquidity in the quarter and our capital structure.

Our third quarter 2007 operating cash flow measured on a GAAP basis for health care and group insurance was $382.4 million. This represents 78% of GAAP net income for the quarter as only two payments rather than the normal three were received from CMS for Medicare reimbursements. This was expected and is consistent with our previous comments earlier this year related to receiving an extra CMS payment during the first quarter.

Year-to-date operating cash flow is $1.7 billion or 128% of net income. In the third quarter, we generated $318 million of holding company cash flow. We also issued $535 million of commercial paper, which remained outstanding as of September 30. This capital generated in the third quarter combined with our June 30th liquidity position of $515 million, resulted in $1.4 billion being available for share repurchases and funding of acquisitions.

Our primary uses of holding company liquidity during the quarter were financing the Schaller Anderson acquisition for approximately $535 million and repurchasing 14.3 million of our shares in the open market for $716 million. We used the remainder of our April 2007 Board authorization to purchase shares and obtained additional share buyback authority of $1.25 billion at the end of September. Our basic share count was 500 million shares at September 30, down from $511 million at June 30.

At the end the third quarter, we maintained $202 million of holding company liquidity. Our capital position is solid and as a result of issuing the commercial paper noted previously, our total debt to total capitalization ratio is approximately 24% just below our target of 25%. We are planning to term out these short-term borrowings with long-term debt. In fact, during the quarter we locked in the underlying treasury on a portion of our anticipated long-term borrowing.

While we are not comfortable with a total-debt to total-capitalization target ratio of 25%, we would consider taking additional capital actions over the next 12 to 18 months to increase our target up to 30%. This could include the issuance of hybrid securities. These actions would serve to reduce our weighted average cost of capital, enhanced returns on common equity and diversify our funding sources.

Regarding capital deployment, our priorities continue to be to finance organic growth, finance strategic acquisition, and repurchase our own shares. Disciplined evaluation of inorganic growth opportunities remains an important element of our strategy for achieving long-term profitable growth. And we continue to maintain an active M&A pipeline.

Our acquisition criteria remains focused on enhancing our operational and product capabilities, managing medical costs and improving quality as well as expanding our market breadth consistent with our strategic objectives of local market density, medical cost management, innovation and customer market segmentation.

Before we move to the Q&A session, I would like to provide some additional guidance for the remainder of 2007 and our expectations for 2008. Given another strong quarter of financial and operational performance, we have increased confidence in our ability to sustain this momentum for the remainder of the year.

To be specific, for the full year 2007, we project medical membership growth to be 600,000 to 650,000 members, which supersedes our prior expectation of between 575,000 to 600,000 net new members.

Double digit Health Care revenue growth; a commercial medical benefit ratio of less than 80%, with a total medical benefit ratio of less than 81%. A medical cost trend of 7.5% plus or minus 50 basis points, a premium yield that is inline with medical cost trend, and operating expense ratio showing a 60 basis point improvement year-over-year, 80 basis points excluding Schaller Anderson, a pre-tax operating margin that is stable to slightly higher than 2006 and operating earnings per share of $3.48, which is based on a 528 million diluted weighted average share count.

We are projecting fourth quarter operating earnings per share of $0 87 in the commercial medical benefit ratio to be in the range of 79% to 79.5%. Fourth quarter operating earnings per share will reflect the increase costs associated with ramping up operationally for our expected strong January 2008 membership growth.

For the full year 2008, we expect solid profitable membership growth in excess of 650,000, a double digit increase in healthcare revenue, a stable commercial medical benefit ratio, with the total medical benefit ratio expected to rise, due to anticipated above average growth in our Medicare business, continued attention to operating expense efficiencies with overall improvement similar to the 2007 level.

While we expect the overall operating margin environment to remain stable, the reported pre-tax operating margin is likely to decline modestly in 2008, primarily due to the impact of growth in Medicare and the full year impact of our acquisitions.

In addition, we expect to continue to use Holding Company cash flow to repurchase shares, absence any acquisition opportunities. All of these components lead us to our operating earnings per share outlook of $4, representing 15% growth over our newly increased 2007 earnings per share guidance of $3.48.

In summary, we are very pleased with our result this quarter along all three dimensions of our financial performance; managing to our target margins, investing in profitable growth and accretive capital deployment. We remain confident in our ability to deliver profitable growth in 2008 and beyond. With that, I will turn the call back over to Jeff. Jeff

Jeff Chaffkin

Thank you, Joe. The Aetna management team is now ready for your questions. We ask that you limit yourself to one question and one follow up, so that as many individuals as possible have an opportunity to ask their questions. Operator, the first question please.

Question-and-Answer Session

Operator

Yes. Thank you. We'll take our first question from Carl Mcdonald, CIBC.

Carl McDonald - CIBC World Markets

Great, thank you. In terms of thinking about the 2007 outlook, you mentioned a slight uptick in pharmacy trends. Maybe you could flush out what you think the pricing and cost and your outlook for next year will look like?

Joe Zubretsky

Well, in terms of the medical cost trend, what we have been indicated is that the medical cost trend will be stable roughly in the 7.5% range plus or minus 50 points, and we would expect that we will continue to price in line with our medical cost.

Carl McDonald - CIBC World Markets

Okay, so, no significant changes then in either?

Joe Zubretsky

No.

Carl McDonald - CIBC World Markets

Alright. And then on the employee retiree, you highlighted that one account that will be added on January 1. Could you size for us what you think the potential growth in the employment market will look like next year and what you think the overall size of that market is for Aetna?

Joe Zubretsky

Well I will talk at the strategic levels as we say it, in terms of ‘08 we will give a lot more color when we get into the fourth quarter call. But what we have said is that we believe that the national council has at least 200,000 members in the National account segments in the first quarter.

Overall we see about 300,000 net membership growth in Q1. But I think that the main focus for us is really how this segmentation strategies is working. I will ask Mark to give a little color in terms of kind of what he is seeing broadly in the marketplace and how we’re winning relative to our competitors.

Mark Bertolini

Yes, Carl, particularly related to the National Account business, as we go into 2008, we’re seeing strong interest in Medicare private fee for service for the retire populations is important, as we look for a way to control cost going forward for the retires. And even more so on the government and the labor sectors to the marketplace where GASB has required that local and state governments now begin to record the retiree liability associated with their healthcare cost going forward. And, so we have seen a lot of interest there. We continue to talk with a lot of accounts. These accounts take a while to make a decision, and so we don’t expect a lot of overwhelming activity in 2008, but we are seeing the beginning of a fairly strong pipeline and are working on that pipeline aggressively.

Carl McDonald - CIBC World Markets

Relatively to the roughly 70,000 Medicare lives you have added this year, do you think directionally, or on an absolutely basis that number would will higher or lower in 2008?

Joe Zubretsky

I would say directionally higher.

Carl McDonald - CIBC World Markets

Great. Thank you.

Operator

We will go next to Matthew Borsch, Goldman Sachs.

Matthew Borsch - Goldman Sachs

Yes, hi good morning. I’m wondering if you could just comment on your view of the contract in growth in your commercial risk book. If we are comparing what we saw from Aetna in this quarter versus a couple of the other major managed care companies that have reported. And maybe if you get into that, can you sort of give us a sense of how much of the growth in the commercial fully insured segment was driven by new segments in new markets versus your sort of long standing existing markets?

Ron Williams

Good morning Mat. I think the difference in terms of our strategy and I will leave it to our competitors to explain their strategy, the main thing that we have tried to do -- I can't tell if I am coming out with an echo there, we're getting one on this end.

Matthew Borsch - Goldman Sachs

It’s on not this end.

Ron Williams

Okay. Thank you. The main thing that we have tried to do is really apply classic consumer market segmentation approaches to find coverts of customers who have distinct needs and distinct purchasing habits and desires and then build businesses around that. And I think, Mark will take you through exactly where the growth is coming from, but I think what's different about our operating model is this really disciplined approach to consumer segmentation at the plan, sponsor and decision level and doing it consistently across an integrated operating model. We're one company. We have a very tightly national integrated operating model also so that we have the ability to quickly defuse innovations across the country. So, if we find something that works in one geography, we can quickly replicate that across our six other regions because of the way that we are organized and how tightly we are integrated as an organization.

Matthew Borsch - Goldman Sachs

Got it.

Mark Bertolini

Good morning, Matt. Let me take you through a few points, first relative to the geography, we grew in all regions in the quarter from a membership standpoint. So, we aren’t growing in any specific region versus another. We tend to be growing faster from a pure percentage basis obviously because of the size in the new geographies that we have opened up. But we continue to expand geographies; eight new geographies and individuals, three geographies in small group, group and individual market openings for Medicare both on the PFFS and on the Medicare Advantage basis. So, from a geographic standpoint continue to look for market opportunities to grow that is supported by some of the acquisitions we have done over the last few years relative to building local market strength with the provider community in being able to develop rates of a marketplace that are competitive from a standpoint of where our competitors are.

But that's not the only place we do it. The end markets where we have traditionally been, we opened up new segments of the market. So the individual marketplace has gone from 3 to 31 markets over the last three years as we have expanded the segment into additional markets where we have traditionally only had small group of middle market and national accounts segmentation. In addition, we continue to grow our Student Health business, so new sectors of the market. And then finally we begin to look at different demographics in marketplaces like the Asian American community, the Hispanic American community and develop product offerings that specifically benefit plan designs but network offerings and distribution channels that best serve these communities, including the types of sales people and service people we hire to support that growth.

Matthew Borsch - Goldman Sachs

If I could just ask one quick related follow-up, would you say that you are seeing may be an easing of the competitive pressure overall although I am sure its highly variable from market-to-market versus may be where we were a year ago and then…yeah sorry go ahead.

Joe Zubretsky

The one thing you can tell from our competitors’ reports is that the competitor pressures in the marketplace still exist and it’s how we execute in marketplace that makes the difference.

Matthew Borsch - Goldman Sachs

You alluded to competitive challenges in the fee based segment that was sort of seem to be a little bit of a new reference, is that the area of business where you are seeing the most intense competition?

Ron Williams

Yeah, I would say that that is both a cyclical activity as well, that is, cases go out to bid. They did have a traditional relationship for a period of time. When they go out, you do see a market check that does introduce a new competitive bidding dynamic into the process. I think I would repeat what I would say, historically as the business is always competitive, the locus of that competition changes from segment to geography to different elements of the business. But it is competitive and it has been competitive and what we are doing is winning in the commercial market by doing a better job of listening to our customers, understanding what they need and then doing something about it by developing solutions that gives them practical reasons to pick us versus our competitors.

Matthew Borsch - Goldman Sachs

Great. Thank you.

Operator

We are going next to Scot Fidel, Deutsche Bank

Scot Fidel - Deutsche Bank

Thanks. Good morning. First question, if you can maybe spike out what your individual customer growth was in the quarter? And then also just in terms of the increased 2007 enrollment guidance, maybe break that down into which customer segments are driving the increase there?

Ron Williams

Yeah. We haven’t really talked about specific growth at the sub-segment level. What I would say, to try to give you a directional element is that the individual has been a steady contributor to growth this year, as we’ve opened a new market. It’s not a predominant source of growth but again back to our strategy is, we are getting good steady growth in lots of discreet segments, and it would be one important contributor.

Scot Fidel - Deutsche Bank

Okay. And then just a follow up around the Medicaid business now that you have Schaller onboard, maybe if you can talk a bit about expectations for 2008, sort of an update on your expected accretion from that? And then, also some of the new markets where you might see opportunities to grow in Medicaid and specifically South Carolina and some of the new TennCare markets, your thoughts on bidding there?

Ron Williams

Well, let me talk just a little about the strategy, one of the reasons we selected Schaller as the partner, we wanted to work with was we thought they had a great franchise and did represent a very compatible culture in terms of a very strong emphasis on medical management and really put in customers at this centre and what they do. What we are looking at and are doing is how we can build on their capability in markets where we are strong. An example would be the implementation that we have underway in Indiana, it's about a 42,000 member implementation that will be effective in ’08. It is a medical management contract as opposed to risk contracts, much to our ASC fee income.

I think we would talk in more detail about what we would expect in ’08 as we get into the next earnings call. But I think we feel very good about where we are. We feel like it has been a very solid acquisition for us. It was a very good team, good cultural fit, and very positive customer feedback, both from their customers in states that had asked us about our interest in helping them address their uninsured problem through use of Medicaid.

Scot Fidel - Deutsche Bank

And you still see that contributing $0.03 for next year?

Joe Zubretsky

Yes we do.

Scot Fidel - Deutsche Bank

Okay, thanks.

Operator

We will go next to John Rex, Bear Stearns.

John Rex - Bear Stearns.

Hi good morning. I have question on Medicare, your med cost ratios in Medicare is running in line with your expectations in the high [8s] but meaningfully above what we are seeing from the rest of the industry and just as you look towards ’08 and you are benefit design you incorporated for ’08 in it, do you anticipate improving those margins or is your target to maintain at that MCR level, I guess, in terms of what kind of opportunities you see there?

Joe Zubretsky

John, this is Joe Zubretsky. Right now, the Medicare Benefit Ratios that we are experiencing are at target levels and they will not change meaningfully in our 2008 plan.

John Rex - Bear Stearns

Okay. So you would be still happy in that level. Good and then also, Joe -- I am sorry if I missed this. What would the share count assumptions you had for ’08 or how much repurchase were you incorporating in your EPS?

Joe Zubretsky

We haven’t given any specific guidance on share count, John, but based on this year's earnings level which creates next year's dividend capacity, we have fully baked that into our $4 per share estimate. So, you can assume that the 2008 plan contemplates a meaningful level of share repurchase.

John Rex - Bear Stearns

Okay. It’s kind of a bit of a departure from your guidance in prior years of that, your initial guidance, is that correct?

Joe Zubretsky

You know when your business throws off a $1.2 billion to $1.5 billion a year, having a plan that has it sitting ideally in cash we are assuming an acquisition, doesn’t make too much sense. So perhaps this is a departure from past practice, but I think it’s the right one. That is the basic capital plan. It would be to repurchase shares and then measure acquisition activity off of the accretion of a share repurchase

Ron Williams

And John I would remind you that our 2008 plan while it’s at the very tail end of being finalized has had not yet been concluded and approved by our Board.

John Rex - Bear Stearns

Okay great. Thank you.

Operator

We’ll go next to Josh Raskin, Lehman Brothers

Josh Raskin - Lehman Brothers

Hi, thanks. Good morning. First question just around some of the newer segments in terms of focus areas of growth. You mentioned a lot the Student business, the Labor, and Government segments and then maybe even the part time business, we have heard a lot of other players now entering those market. I was just curious if you are seeing any changes in the competitive dynamics, it didn't sound like the Students business was impacted, but just curious to hear what sort of competitive pressure are you seeing?

Mark Bertolini

Josh, this is Mark Bertolini. I would say that depending on the segment for example an individual as we go and then expand markets and as our competitors realize we are growing in those markets we see some reaction, however, because of the portfolio we offer it’s difficult for them to react across the board. So, in some instances in markets where we’ve been challenged in the small group segment where we have been introduced to individual, it's become a hedge both competitively and growth wise in that marketplace for us from the standpoint of our competitors being able to single in on any single segment of our business.

In addition, individually as we grow tends to have some of that aspect, small group really not a whole lot of impact. We continue to see the competitive markets that we've seen in the past are largely with the regional blues. In the national account sector, I would say that we have seen because all of the major national players are healthy that we've seen a relatively competitive marketplace there, but no more than it was last year.

Josh Raskin - Lehman Brothers

Okay. That's helpful. And then just more of a management question, there has been a lot of management [talk] broadly speaking in the industry, but Aetna has had a couple of mergers as well, so just any thought in terms of organizational structure, maybe from Ron if you anticipate any changes in the next year or so and then maybe specifically Craig Callen's departure? Should we read into anything, you know, a real matter around the M&A opportunity in future?

Ron Williams

I would say that one of the things we feel very strong about is, we have a very strong advantage is that we have a lot of long-term talent. We have very rigorous succession planning and talent development process, that's something that I personally and the executive committee of the company has spent a good deal of time on being certain that we are developing the next generations of people who really understand multiple facets of the business, really understand different customer segments and really understand our unique operating model and the culture of the company and how we expect to win long term strategically.

So from our point of view, you always hate to lose good people, but you see normal comings and goings. I think Craig was a very important contributor to our success. He has chosen to do some other things. We certainly wish him well. He's been a great colleague and a partner. I think our strategy is a strategy that I and the executive committee have really been active participants in developing and you should expect that we will continue to execute our strategy as you have seen it unfold over the past several years.

Josh Raskin - Lehman Brothers

Okay. That's great. Thanks.

Operator

We will go next to Peter Costa, FTN Midwest Securities.

Peter Costa - FTN Midwest Securities

Hi, can you talk a little bit about the Good Health acquisition, and in particular if you can quantify sort of the cross-selling opportunity of its products to your current account base. And then if you have started to explore selling to its account base some of your products.

Ron Williams

Yes. Good morning, Peter. The Good Health acquisition for us was a very exciting opportunity to build on a franchise that we have been growing very successfully which is the expatriate market principally targeted toward US corporations who are increasingly becoming international and having more of their work force operating around the globe. What we had an excellent capability to do, was to interface with US style benefits and yet connect them through healthcare delivery systems that we have established in other countries so that they can get the care they needed there or be brought back to other locations to get more complicated and extensive care.

The exciting part about Good Health is it gives us the capability to dock with the European style benefit plans. And so for us, it opens up the compliment of the US companies which are companies headquartered in Europe and other parts of the growth, Asia, where we can take their expatriates who are moving around the globe and offer them a very complimentary service. So it really gives us a global solution. It also brought us capability that was targeted toward a smaller end of the market as well, and they also do have some individual capability targeted principally to high-net-worth individuals who tend to be kind of global citizens who travel around quite a bit. And so for us, it is very exciting. We think that it will give us some good growth opportunities and help us really follow our customers in the context in meeting their needs.

Peter Costa - FTN Midwest Securities

Okay. Thanks and then a follow–up on the Group Retiree business. Can you quantify what you have sold today in terms of group retirees and what do you expect that to acquire for next year?

Ron Williams

I don’t know that we have quantified it specifically year-to-date. But I think, the way I would probably try to answer at it is, that if you look at -- I would say let us get back to you on that if we would and I don’t that we have talked about it specifically. We have given some color on accounts and we try to say directionally it has been some what important this year and more important next year. And what I would probably say is, stay tuned in February and we should give you more detail and color.

Peter Costa - FTN Midwest Securities

Alright, thank you.

Operator

We will go next to Justin Lake, UBS

Justin Lake - UBS

Thanks. Good morning. The first question is on the commercial MLR, it looks to be running significantly better than expected, obviously seeing solid cost around. So, I am wondering if there is any specific drivers that you can point us to as to what is driving your performance and secondly may be you can bifurcate between the existing book and how that’s been performing verses some of the new markets and products that you are rolling out?

Mark Bertolini

Justin, there really is no one underlying factor that’s contributing towards success in the commercial MBR. We are predicting cost trend. We are managing our cost categories, we are able to put attractive benefit designs in place, and basically forecast appropriately and manage to it. All segments are hitting there target MBRs, all regions. So the news that you see is pretty reflective of the reality of the situation.

Justin Lake - UBS

Okay. Is there any mix change that's going on that is doing better in may be in the individual products that are lower MLR?

Joe Zubretsky

Yeah, but quarter-to-quarter or even year-over-year there are mix effects but they are not significant. And you are right, individual products and Student Health and these types of products generally have lower benefit design. So, there are some issues with mix but in this quarter’s result there is no significant mix effect in the MBR

Justin Lake - UBS

Okay and just one quick question on membership. Within that 650,000 members, I think it will be helpful if you could just spike out maybe what the benefits you are imbedding into that number R from the AARP relationship as well as the HRPA. And then, I think with in that Medicare private fee for service contract you mentioned, I want to make sure that’s not a new win, right? That would just be a conversion from a current ASO account. So that wouldn’t be imbedded in the new membership number, correct?

Joe Zubretsky

That’s correct. In terms of 2008, I think you should look at it this way that significant membership increases in AARP would be upside to the 650 and HRPA as well. And yes the conversion of a self insured Medicare account to a full risk insured account will not increase membership but will increase the revenue once we understand the open enrollment. That is why we are not giving guidance on the revenue take on that conversion today.

Justin Lake - UBS

Got it, thanks.

Operator

We will go next to [Bill George] - JP Morgan

Bill George - J P Morgan

Thanks, good morning. Throughout ’07 you have combined well above average membership growth with a very stable medical loss ratio. And my question is, as you look out into ’08, forecasting another year of above industry average membership growth. How confident are you of two specific metrics; first of all, your pricing and are you winning business based on price. And then the flipside of the same coin is, how confident are you on the cost side that you are capturing the true actuarial movements in costs given such a rapid increase in volume?

Joe Zubretsky

Well I would start out by saying that we’ve a very disciplined pricing strategy and we continue to focus on making certain that we are achieving profitable growth and in the context of the medical costs, we think we have good information and good systems. That’s always in the context of the inherit nature of completion factors and what you know about the business, but I think we feel very good about where we are. I think I would also suggest that the growth is widely diversified and in very identifiable and defined pockets where we had actuaries, financial staff, underwriters and a team of people focused on trying to be certain that we have properly aligned pricing and cost. So still the answer is, we feel very good about where we are and are comfortable.

Bill George - J P Morgan

Okay. And just on the slight pressure from our Rx costs that you are seeing, is there an offset because you seem to be holding your cost forecast within the same range?

Ron Williams

There's Mark responding that.

Mark Bertolini

Yeah Bill we are seeing the uptick year over year as a result of the generic launches in 2007, particularly around simvastatin. So, we are seeing a release of that. That’s being baked into the baseline and now we are seeing the normal trend takeover again. So that’s the shift we see. However, because of our investments in mail order delivery where we have much a higher generic penetration rate and in specialty pharmacy, where we were dealing with a lot of the pharmaceutical issues that are embedded in the medical benefit we see that our pharmacy trend will be offset by other issues even within pharmacy trend overall and then across the rest of the medical cost spectrum.

Bill George - J P Morgan

Okay. And if I could, I had just one more quick one on TRICARE, can you update us in terms of the timing of that process?

Ron Williams

Well we are awaiting the TRICARE RFP to actually be issued. We had expected it few weeks ago. There is a new date. We will see if that date is actually achieved. Once we have the RFP in house, we would be in a position to then analyze it and determine the degree to which we believe we can offer the government a superior solutions, which we believe there is a potential for us to do. But we would wait to actually receive the RFP to understand the true request.

Bill George - J P Morgan

Okay. Can you share the date with us?

Ron Williams

Right now I believe it is November 15. But it was October 9th last, so we we’ll see what happens. I am sure they have lots of things going on and they want to make certain that it is done right.

Bill George - J P Morgan

Great. Thank you

Operator

We will take our next question from Matt Perry, Wachovia Capital Markets.

Matt Perry - Wachovia Capital Markets

Hi good morning. Just wanted to clarify on the positive prior period development in the Medicare business. First, can you give some details on specifically kind of what components of cost trend that related to? And then second I want to be clear and understanding that its sound like you don’t expect that favorable development to lead to kind of better MCR going forward? And why isn’t that the case?

Joe Zubretsky

Now this is Joe Zubretsky. I think there is a point Ron made just a few minutes ago. We enter a new market with a new product. You know, we take a very cautious and conservative view of the profitability of that product and what you are seeing is launched Private Fee-for-Service earlier in the year. We took a very cautious view on medical costs and now with three quarters of visibility, we need to release those reserves and get it back to its target profitability. And that’s really what you are seeing.

Matt Perry - Wachovia Capital Markets

And anything specific you want to highlight on what those costs relate to?

Joe Zubretsky

No I think we priced it to a target. We probably accounted for it, [and once that's] the target and now we are releasing it back to its pricing target.

Matt Perry - Wachovia Capital Markets

Okay. And then just a second question on Medicare, what type of yield on per member per month revenue should we be expecting for ’08?

Joe Zubretsky

I think on balance when you look at the Medicare products you know they range from $950 a month to a $1,000 a month and you should continue to use that rate.

Matt Perry - Wachovia Capital Markets

Okay, thanks. That’s all I had.

Operator

We’ll go next to Christine Arnold, Morgan Stanley.

Christine Arnold - Morgan Stanley

Good morning. Question for me relates to your commercial MLR, commercial MLR is doing really, really well, but you are kind of approaching kind of the trough levels we saw entering 2006 when you guys have decided kind of renewing small groups who were coming in at a higher MLR because of the competitive pressures and other things. Could you talk about what your business mix is right now how many individual, how many small group, how many large group, with respect to your Aetna's commercial book? And is this the long-term sustainable MLR given that business mix? Or will there be upward pressure over the next three to five years?

Joe Zubretsky

I think Christine, this is Joe. The business mix hasn’t changed all that much. Yes, the individual product line Medicare is growing faster than the core business, but as I said you know there has been no significant mix effect in the MBR reported this quarter. All products are hitting their target margins and we are very confident that you know some where around the 80% level for the MBR seems to be equilibrium in the marketplace.

Ron Williams

Christine, we look at by segment our new business MLRs versus our renewing business MLRs versus our departing business MLRs

Christine Arnold - Morgan Stanley

Okay

Ron Williams

And we see those as very stable and consistent with our expectations for next year. And again we are not competing on price in markets where we are growing, we are competing on our distribution channels and the types of products we are offering including our networks.

Christine Arnold - Morgan Stanley

Can you give us a sense for your business mix right now, individual, small group or large group or the commercial at-risk book?

Ron Williams

I don’t think we are prepared to give that delineation on our membership at this time, Christine.

Christine Arnold - Morgan Stanley

Okay thank you

Operator

We’ll go next to Charles Boorady, Citi

Charles Boorady - Citi

Thanks, good morning. My first question on commercial risk enrollment, you've talked about individuals as one of many growth drivers and one that you’ve had lot of success in it. I wonder what your individual enrollments and how that's grown over the past year or two?

Ron Williams

I would start directionally, Charles, when we started down the process of focusing on this segment our enrollment was really minimal. We really did not have a capability that we had developed to serve this market. The enrollment was really the residual of what we had from states where you had to issue to a individual product, and New York was one of those states, and then we had a little bit of conversion business. So, I would say that as we have rolled out across the country, based on building the capabilities and the underwriting software and the tools and recruiting and developing the staff, we feel very good about the growth prospects. As you know, there are approximately 19 million people in the United States who purchase their own individual health insurance and Aetna had virtually none of that business. We have a great brand. We have many people who are working now on one of my national accounts in there, graphic designer and they decide to leave and that their business have won and they would love to buy an individual policy. And so our brand is really helping us a lot. In terms of the membership, I am going to ask Joe, I am now sure if we talk specifically about it.

Joe Zubretsky

We haven't really talked specifically about it, but it's not a huge category for us. With over 16 million members, it’s less than 2% of the membership. So as it gets more meaningful we'll spike that out for you.

Charles Boorady - Citi

Great. And can you talk about your backlog of Medicare Advantage opportunities with retirees, is that something that you are seeing a potential for in '08 or might it be more of an '09 or '10 opportunity in particular with the HRPA relationship?

Ron Williams

Charles, you are referring to the sales pipeline, is that the…?

Charles Boorady - Citi

Yes.

Ron Williams

Okay. Mark?

Mark Bertolini

Yes, Charles, I will take sort of three different views for you, in the government and labor sector we see a lot of interest around how government is particularly organized or [bargained] governments handle their retiree liabilities going forward and to peg that retiree liability including how to fund some of them. Because there is some ramification of their own funded liabilities. And so, we have that conversation going on. Those are longer lead times. Those generally take longer then a year to convince, they ought to move, and some of them are just coming up to the speed on GASB as we speak. In HRPA we've had a lot of discussions as we've launched the product. We've had a lot of bids that we put in front of employers who are working through those bids. Those are nearer term and we expect that we will see continued opportunity in that pipeline as we go through the next 12 months to 18 months. And then in the individual business our relationship with AARP and our growing Medicare Advantage business that’s going to largely depend on how the government reacts to Medicare Advantage and the verbal support in funding this, they provide for that.

Charles Boorady - Citi

Can you size any of those up-mark, the GASB opportunity in particular, what a rough ballpark number is there? How many eligible lives?

Ron Williams

We haven’t given that number, I can tell you the unfunded GASB liability in the United States is approaching over $1.3 trillion.

Charles Boorady - Citi

Alright, thank you.

Operator

And there are no further questions. Mr. Chaffkin, I would like to turn the call back over to you for any additional or closing remarks.

Jeff Chaffkin

Thank you. I just want all the people to know that a transcript of the prepared portion of this call will be posted shortly on the Investor Information section of the Aetna website at aetna.com. If you have any questions about matters discussed this morning, please feel free to call me or one of my colleagues in the Investor Relations office. Thank you again for joining us this morning.

Operator

And this does conclude today's conference. Thank you for you participation.

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