There were 567.0 million shares of voting common stock with a par value of $.01 outstanding at March 31, 2006.

Table of Contents				Page
Part I		Financial Information
Item 1.		Financial Statements			1
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			33
Item 4.		Controls and Procedures			33
Part II		Other Information
Item 1.		Legal Proceedings			34
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 6.		Exhibits			36
Signatures					37
Index to Exhibits					38
EX-10.1: 2000 STOCK INCENTIVE PLAN
EX-12.1: COMPUTATION OF RATIOS
EX-15.1: LETTER FROM KPMG LLP
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

Part I Financial Information

Item 1. Financial Statements

Consolidated Statements of Income
(Unaudited)

		For the Three Months
		Ended March 31,
(Millions, except per common share data)		2006				2005
Revenue:
Health care premiums		$	4,726.1			$	4,053.5
Other premiums			502.1				498.5
Fees and other revenue *			690.9				579.3
Net investment income			298.0				291.2
Net realized capital gains			17.6				4.4
Total revenue			6,234.7				5,426.9
Benefits and expenses:
Health care costs **			3,786.2				3,048.5
Current and future benefits			600.7				615.3
Operating expenses:
Selling expenses			243.5				203.0
General and administrative expenses			953.6				913.2
Total operating expenses			1,197.1				1,116.2
Interest expense			33.5				27.2
Amortization of other acquired intangible assets			19.9				10.7
Total benefits and expenses			5,637.4				4,817.9
Income from continuing operations before income taxes			597.3				609.0
Income taxes (benefits):
Current			227.2				168.5
Deferred			(15.5	)			51.2
Total income taxes			211.7				219.7
Income from continuing operations			385.6				389.3
Discontinued operations, net of tax (Note 16)			16.1				-
Net income		$	401.7			$	389.3
Earnings per common share:
Basic:
Income from continuing operations		$	.68			$	.66
Discontinued operations, net of tax			.03				-
Net income		$	.71			$	.66
Diluted:
Income from continuing operations		$	.65			$	.64
Discontinued operations, net of tax			.03				-
Net income		$	.68			$	.64

* Fees and other revenue include administrative service contract member co-payment revenue and plan sponsor reimbursements related to our mail order and specialty pharmacy operations of $8.2 million and $4.1 million (net of pharmaceutical and processing costs of $328.7 million and $199.1 million) for the three months ended March 31, 2006 and 2005, respectively.

** Health care costs have been reduced by fully insured member co-payment revenue related to our mail order and specialty pharmacy operations of $22.5 million and $17.1 million for the three months ended March 31, 2006 and 2005, respectively.

Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Consolidated Balance Sheets

		(Unaudited)
		At March 31,				At December 31,
(Millions)		2006				2005
Assets:
Current assets:
Cash and cash equivalents		$	1,340.8			$	1,192.6
Investment securities			13,033.7				13,366.2
Other investments			83.3				96.8
Premiums receivable, net			440.8				349.2
Other receivables, net			471.0				366.7
Accrued investment income			189.4				184.9
Collateral received under securities loan agreements			1,064.2				1,138.8
Loaned securities			1,023.8				1,115.7
Deferred income taxes			25.5				-
Other current assets			504.1				423.8
Total current assets			18,176.6				18,234.7
Long-term investments			1,679.8				1,662.1
Mortgage loans			1,480.0				1,460.8
Investment real estate			199.6				207.2
Reinsurance recoverables			1,128.9				1,143.7
Goodwill			4,610.4				4,523.2
Other acquired intangible assets, net			766.9				724.9
Property and equipment, net			275.8				272.8
Deferred income taxes			148.8				68.7
Other long-term assets			1,788.1				1,602.8
Separate Accounts assets			15,407.5				14,532.4
Total assets		$	45,662.4			$	44,433.3
Liabilities and shareholders’ equity:
Current liabilities:
Health care costs payable		$	1,934.9			$	1,817.0
Future policy benefits			801.9				806.1
Unpaid claims			746.2				752.1
Unearned premiums			353.3				156.9
Policyholders’ funds			736.1				757.7
Collateral payable under securities loan agreements			1,064.2				1,138.8
Short-term debt			460.4				-
Current portion of long-term debt			-				450.0
Income taxes payable			144.5				36.7
Deferred income taxes			-				10.4
Accrued expenses and other current liabilities			1,497.4				1,691.1
Total current liabilities			7,738.9				7,616.8
Future policy benefits			7,627.2				7,642.1
Unpaid claims			1,148.4				1,144.9
Policyholders’ funds			1,298.8				1,304.2
Long-term debt, less current portion			1,155.7				1,155.7
Other long-term liabilities			832.9				848.5
Separate Accounts liabilities			15,407.5				14,532.4
Total liabilities			35,209.4				34,244.6
Commitments and contingencies (Note 13)
Shareholders’ equity:
Common stock and additional paid-in capital ($.01 par value; 2.9 billion shares authorized, 567.0 million shares issued and outstanding in 2006 and 1.4 billion shares authorized, 566.5 million shares issued and outstanding in 2005)			2,381.9				2,414.7
Retained earnings			8,125.4				7,723.7
Accumulated other comprehensive (loss) income			(54.3	)			50.3
Total shareholders’ equity			10,453.0				10,188.7
Total liabilities and shareholders’ equity		$	45,662.4			$	44,433.3

Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Shareholders’ Equity
(Unaudited)

						Common
		Number of				Stock and								Accumulated
		Common				Additional								Other				Total
		Shares				Paid-in				Retained				Comprehensive				Shareholders'				Comprehensive
(Millions)		Outstanding				Capital				Earnings				(Loss) Income				Equity				Income
Three Months Ended March 31, 2006
Balance at December 31, 2005			566.5			$	2,414.7			$	7,723.7			$	50.3			$	10,188.7
Comprehensive income:
Net income			-				-				401.7				-				401.7			$	401.7
Other comprehensive loss:
Net unrealized losses on securities (1)			-				-				-				(115.0	)			(115.0	)
Net foreign currency losses			-				-				-				(.3	)			(.3	)
Net derivative gains (1)			-				-				-				10.7				10.7
Other comprehensive loss			-				-				-				(104.6	)			(104.6	)			(104.6	)
Total comprehensive income																						$	297.1
Common shares issued for benefit plans, including tax benefits			3.5				118.1				-				-				118.1
Repurchases of common shares			(3.0	)			(150.9	)			-				-				(150.9	)
Balance at March 31, 2006			567.0			$	2,381.9			$	8,125.4			$	(54.3	)		$	10,453.0
Three Months Ended March 31, 2005
Balance at December 31, 2004			586.0			$	3,541.5			$	6,161.8			$	(541.5	)		$	9,161.8
Comprehensive income:
Net income			-				-				389.3				-				389.3			$	389.3
Other comprehensive loss:
Net unrealized losses on securities (1)			-				-				-				(110.8	)			(110.8	)
Net foreign currency losses			-				-				-				(.2	)			(.2	)
Net derivative losses (1)			-				-				-				(.1	)			(.1	)
Other comprehensive loss			-				-				-				(111.1	)			(111.1	)			(111.1	)
Total comprehensive income																						$	278.2
Common shares issued for benefit plans, including tax benefits			10.4				245.6				-				-				245.6
Repurchases of common shares			(15.5	)			(561.6	)			-				-				(561.6	)
Balance at March 31, 2005			580.9			$	3,225.5			$	6,551.1			$	(652.6	)		$	9,124.0

Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Consolidated Statements of Cash Flows
(Unaudited)

		Three Months Ended
		March 31,
(Millions)		2006				2005
Cash flows from operating activities:
Net income		$	401.7			$	389.3
Adjustments to reconcile net income to net cash provided by operating activities:
Discontinued operations			(16.1	)			-
Depreciation and amortization			65.2				45.1
Amortization of net investment premium			2.8				10.3
Stock-based compensation expense			38.1				53.4
Net realized capital gains			(17.6	)			(4.4	)
Changes in assets and liabilities:
(Increase) decrease in accrued investment income			(4.5	)			5.1
Increase in premiums due and other receivables			(93.6	)			(80.8	)
Net change in income taxes			58.7				122.9
Net change in other assets and other liabilities			(358.8	)			(436.2	)
Net increase in health care and insurance liabilities			274.7				2.6
Other, net			(36.2	)			(34.3	)
Net cash provided by operating activities of continuing operations			314.4				73.0
Discontinued operations, net (Note 16)			49.7				-
Net cash provided by operating activities			364.1				73.0
Cash flows from investing activities:
Proceeds from sales and investment maturities of:
Debt securities available for sale			2,769.4				2,287.1
Other investments			568.7				308.7
Cost of investments in:
Debt securities available for sale			(2,783.9	)			(2,238.6	)
Other investments			(494.1	)			(266.7	)
Increase in property, equipment and software			(62.6	)			(47.1	)
Cash used for acquisitions, net of cash acquired			(157.0	)			(241.7	)
Net cash used for investing activities			(159.5	)			(198.3	)
Cash flows from financing activities:
Deposits and interest credited for investment contracts			9.0				9.0
Withdrawals of investment contracts			(5.5	)			(11.7	)
Proceeds from net issuance of short-term debt			460.4				-
Repayment of long-term debt			(450.0	)			-
Common shares issued under benefit plans			37.8				118.7
Stock-based compensation tax benefits			42.8				71.5
Common shares repurchased			(150.9	)			(528.2	)
Net cash used for financing activities			(56.4	)			(340.7	)
Net increase (decrease) in cash and cash equivalents			148.2				(466.0	)
Cash and cash equivalents, beginning of period			1,192.6				1,396.0
Cash and cash equivalents, end of period		$	1,340.8			$	930.0
Supplemental cash flow information:
Interest paid		$	50.9			$	44.1
Income taxes paid			60.3				25.0

Refer to accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

Condensed Notes to Consolidated Financial Statements
(Unaudited)

Unless the context otherwise requires, references to the terms “we,” “our,” or “us” used throughout these Notes, refer to Aetna Inc. (a Pennsylvania corporation) (“Aetna”) and its subsidiaries (collectively, the “Company”).

1.

Organization

Our operations include three business segments:

	•		Health Care consists of medical, dental and pharmacy benefits management plans offered on both a risk basis (where we assume all or a majority of the risk for medical and dental care costs) and an employer-funded basis (where the plan sponsor under an administrative services contract (“ASC”) assumes all or a majority of this risk). Medical plans include point-of-service (“POS”), health maintenance organization (“HMO”), preferred provider organization (“PPO”) and indemnity benefit (“Indemnity”) products. Medical plans also include health savings accounts (“HSAs”) and Aetna HealthFund®, consumer-directed plans that combine traditional POS or PPO and/or dental coverage, subject to a deductible, with an accumulating benefit account (which may be funded by the plan sponsor or member in the case of HSAs). We also provide specialty products, such as medical management and data analytics, as well as products that provide access to our provider network in select markets.
	•		Group Insurance includes group life insurance products offered on a risk basis, as well as group disability and long-term care insurance products offered on both a risk and an employer-funded basis.
	•		Large Case Pensions manages a variety of retirement products (including pension and annuity products) primarily for tax qualified pension plans. These products provide a variety of funding and benefit payment distribution options and other services. The Large Case Pensions segment includes certain discontinued products (refer to Note 15 for additional information).

On January 27, 2006, our Board of Directors (the “Board”) declared a two-for-one stock split of our common shares (“common stock”) which was effected in the form of a 100% common stock dividend. All shareholders of record at the close of business on February 7, 2006 received one additional share of common stock for each share held on that date distributed in the form of a stock dividend on February 17, 2006. All share and per share amounts in the accompanying consolidated financial statements and related notes have been adjusted to reflect the stock split for all periods presented.

These interim statements necessarily rely heavily on estimates, including assumptions as to annualized tax rates. In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made. All such adjustments are of a normal, recurring nature. The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes presented in our 2005 Annual Report on Form 10-K (the “2005 Annual Report”). Certain financial information that is normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), but that is not required for interim reporting purposes, has been condensed or omitted.

2.

Summary of Significant Accounting Policies

Principles of Consolidation
These unaudited consolidated financial statements have been prepared in accordance with GAAP and include our accounts and the accounts of subsidiaries that we control. All significant intercompany balances have been eliminated in consolidation.

New Accounting Standard
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“FAS”) No. 123 Revised, “Share-Based Payment” (“FAS 123R”), which is a revision of FAS 123, “Accounting for Stock-Based Compensation.” FAS 123R also supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and amends FAS 95, “Statement of Cash Flows.”

Prior to the adoption of FAS 123R, we applied the provisions of FAS 123 to our stock-based compensation arrangements. FAS 123 permitted us to account for our stock-based compensation using the intrinsic value method prescribed by APB 25, accompanied by pro forma disclosures of net income and earnings per share as if we had applied the fair value method to such compensation.

FAS 123R requires companies to expense the fair value of all stock-based compensation awards (including stock options, stock appreciation rights and other stock-based awards) issued to employees and non-employees, eliminating the alternative of measuring such awards using the intrinsic value method. FAS 123R requires the fair value to be calculated using a quoted market price or a valuation model (such as the modified Black-Scholes or binomial-lattice models) if a quoted market price is not available. Consistent with our historical practice of measuring the fair value of stock-based compensation for our pro forma disclosures, we utilize a modified Black-Scholes model to determine the fair value of our stock-based compensation awards. Stock-based compensation expense is measured at the grant date, based on the fair value of the award and is recognized as expense over the requisite service period, which primarily is the vesting period, except for retirement eligible individuals for whom a majority of the expense is recognized in the first year.

The amendment to FAS 95 requires the benefits of tax deductions in excess of recognized compensation cost to be reported as financing cash inflows rather than as a reduction in income taxes paid, which is included within operating cash flows.

We utilized the modified-retrospective approach of adopting FAS 123R. Under this approach, beginning January 1, 2006, all prior period financial information was adjusted to reflect our stock-based compensation activity since 1995. The modified-retrospective application of FAS 123R resulted in a reduction in net income and net income per common share for the three months ended March 31, 2005 of $35 million ($53 million pretax) and $.06 per share and $.05 per share (calculated for basic and diluted weighted average shares, respectively). Additionally, $72 million of cash inflows related to tax deductions in excess of recognized compensation costs have been reclassified from operating cash flows to financing cash flows for the three months ended March 31, 2005.

Prior period shareholders’ equity and deferred taxes have been increased to reflect the results of the modified-retrospective application of FAS 123R. The following table details the impact of FAS 123R on our Consolidated Balance Sheet as of December 31, 2005:

		Retrospectively				Previously
(Millions)		Applied				Reported
Net deferred income tax asset (liability)		$	58.3			$	(25.5	)
Common stock and additional paid-in capital			2,414.7				1,885.1
Retained earnings			7,723.7				8,169.5

Additionally, the balances in shareholders’ equity at December 31, 2004 in our Consolidated Statements of Shareholders’ Equity reflect the following changes:

		Retrospectively				Previously
(Millions)		Applied				Reported
Common stock and additional paid-in capital		$	3,541.5			$	3,076.5
Retained earnings			6,161.8				6,546.4

Refer to Note 9 for additional information on our stock-based compensation plans.

Use of Estimates

Accounting for the Medicare Part D Prescription Drug Program (“PDP”)
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act expanded Medicare, primarily by adding a voluntary prescription drug benefit for Medicare eligible individuals beginning in 2006. We were selected by the Centers for Medicare and Medicaid Services (“CMS”) to be a national provider of PDP in all 50 states to both individuals and employer groups beginning in 2006. Under these annual contracts, CMS pays us a portion of the premium, a portion of, or a capitated fee for, catastrophic drug costs, a portion of the health care costs for low-income Medicare beneficiaries and provides a risk sharing arrangement to limit our exposure to unexpected expenses.

Premiums received from, or on behalf of, members or CMS and capitated fees are recognized as premium revenue ratably over the contract period. Costs for covered prescription drugs are expensed as incurred. Low-income costs (deductible, coinsurance, etc.) and the catastrophic drug costs paid in advance by CMS will be recorded as a liability and will offset medical costs when incurred. For individual PDP coverage, the risk sharing arrangement provides a risk corridor whereby the target amount (what we received in premiums from members and CMS based on our annual bid amount less administrative expenses) is compared to our actual drug costs incurred during the contract year. Based on the risk corridor provision, an estimated risk sharing receivable or payable is recorded on a quarterly basis as an adjustment to premium revenue, based on PDP activity to date. A reconciliation of the final risk sharing, low-income subsidy, and catastrophic amounts is performed at the end of the contract year.

3.

Acquisition

On March 31, 2006, we acquired the disability and leave management businesses of Broadspire Services, Inc. and Broadspire Management Services, Inc. (collectively, “Broadspire Disability”) for approximately $160 million. Broadspire Disability operates as a third party administrator offering absence management services, including short-term and long-term disability administration and leave management to employers. We preliminarily recorded approximately $87 million of goodwill associated with the acquisition of Broadspire Disability, representing the purchase price in excess of the fair value of the net assets acquired (which includes approximately $58 million of intangible assets, primarily consisting of a customer list and technology). Our intangible assets and goodwill associated with the acquisition of Broadspire Disability are subject to adjustment upon completion of a purchase accounting valuation.

4.

Earnings Per Common Share

A reconciliation of the numerator and denominator of the basic and diluted earnings per common share (“EPS”) for the three months ended March 31, 2006 and 2005 is as follows:

(Millions, except per common share data)		2006				2005
Income from continuing operations		$	385.6			$	389.3
Weighted average shares used to compute basic EPS			567.4				586.6
Dilutive effect of outstanding stock-based compensation awards (1)			25.7				26.4
Weighted average shares used to compute diluted EPS			593.1				613.0
Basic EPS		$	.68			$	.66
Diluted EPS		$	.65			$	.64

5.

Operating Expenses

For the three months ended March 31, 2006 and 2005, selling expenses (which include broker commissions, the variable component of our internal sales force compensation and premium taxes) and general and administrative expenses were as follows:

(Millions)		2006				2005
Selling expenses		$	243.5			$	203.0
General and administrative expenses:
Salaries and related benefits			597.2				592.6
Other general and administrative expenses			356.4				320.6
Total general and administrative expenses			953.6				913.2
Total operating expenses		$	1,197.1			$	1,116.2

6.

Goodwill and Other Acquired Intangible Assets

Changes in the carrying amount of goodwill for the three months ended March 31, 2006 and 2005 were as follows:

(Millions)		2006				2005
Balance, beginning of period		$	4,523.2			$	3,687.8
Goodwill acquired:
Broadspire Disability			87.1	(1)			-
SRC			-				122.7
Other			.1				.1
Balance, end of the period		$	4,610.4			$	3,810.6

Other acquired intangible assets at March 31, 2006 and December 31, 2005 were as follows:

						Accumulated								Amortization
(Millions)		Cost				Amortization				Net Balance				Period (Years)
March 31, 2006
Other acquired intangible assets:
Customer lists		$	1,164.3			$	944.9			$	219.4			4-10
Provider network			696.2				260.4				435.8			12-25
Technology			69.1				9.6				59.5			3-5
Other			34.9				5.0				29.9			3-12
Trademarks and tradenames (indefinite lived)			22.3				-				22.3			Indefinite
Total other acquired intangible assets (1)		$	1,986.8			$	1,219.9			$	766.9
December 31, 2005
Other acquired intangible assets:
Customer lists		$	1,132.4			$	937.5			$	194.9			4-9
Provider networks			696.2				253.2				443.0			12-25
Technology			44.1				6.2				37.9			3-5
Other			29.9				3.1				26.8			3-12
Trademarks and tradenames (indefinite lived)			22.3				-				22.3			Indefinite
Total other acquired intangible assets		$	1,924.9			$	1,200.0			$	724.9

Annual pretax amortization for other acquired intangible assets over the next five calendar years is estimated to be as follows:

(Millions)
2007		$	87.6
2008			81.2
2009			69.9
2010			66.1
2011			59.1

7.

Investments

Total investments at March 31, 2006 and December 31, 2005 were as follows:

		March 31, 2006												December 31, 2005
(Millions)		Current				Long-term				Total				Current				Long-term				Total
Debt securities available for sale:
Available for use in current operations		$	12,896.0	(1)		$	-			$	12,896.0			$	13,216.9	(1)		$	-			$	13,216.9
Loaned securities			1,023.8				-				1,023.8				1,115.7				-				1,115.7
On deposit, as required by regulatory authorities			-				519.5	(3)			519.5				-				522.4	(3)			522.4
Debt securities available for sale			13,919.8				519.5				14,439.3				14,332.6				522.4				14,855.0
Equity securities available for sale			31.2	(1)			38.1	(3)			69.3				34.5	(1)			26.7	(3)			61.2
Short-term investments			106.5	(1)			-				106.5				114.8	(1)			-				114.8
Mortgage loans			77.9	(2)			1,480.0				1,557.9				86.7	(2)			1,460.8				1,547.5
Investment real estate			3.0	(2)			199.6				202.6				7.4	(2)			207.2				214.6
Other investments			2.4	(2)			1,122.2	(3)			1,124.6				2.7	(2)			1,113.0	(3)			1,115.7
Total investments		$	14,140.8			$	3,359.4			$	17,500.2			$	14,578.7			$	3,330.1			$	17,908.8

Components of net investment income were as follows for the three months ended March 31, 2006 and 2005:

(Millions)		2006				2005
Debt securities		$	207.7			$	216.3
Mortgage loans			29.5				27.8
Other			69.5				55.9
Gross investment income			306.7				300.0
Less: investment expenses			(8.7	)			(8.8	)
Net investment income (1)		$	298.0			$	291.2

Net realized capital gains (losses) on investments for the three months ended March 31, 2006 and 2005, excluding amounts related to experience-rated contract holders and discontinued products, were as follows:

(Millions)		2006				2005
Debt securities		$	7.7			$	5.0
Equity securities			3.7				-
Derivatives			7.8				(.3	)
Other			(1.6	)			(.3	)
Pretax net realized capital gains		$	17.6			$	4.4
After tax net realized capital gains		$	11.5			$	2.9

Net realized capital gains of $7 million and $2 million for the three months ended March 31, 2006 and 2005, respectively, related to experience-rated contract holders were reflected in policyholders’ funds. Net realized capital gains of $16 million and $1 million for the three months ended March 31, 2006 and 2005, respectively, related to discontinued products were reflected in the reserve for anticipated future losses on discontinued products (refer to Note 15).

8.

Other Comprehensive (Loss) Income

Changes in accumulated other comprehensive (loss) income related to changes in net unrealized gains (losses) on securities (excluding those related to experience-rated contract holders and discontinued products) and derivatives for the three months ended March 31, 2006 and 2005 were as follows:

(Millions)		2006				2005
Securities:
Net unrealized holding losses arising during the period (1)		$	(109.4	)		$	(113.9	)
Less: reclassification adjustment for gains (losses) included in net income (2)			5.6				(3.1	)
Net unrealized losses on securities		$	(115.0	)		$	(110.8	)
Derivatives:
Net derivative gains (losses) arising during the period (3)		$	15.6			$	(.4	)
Less: reclassification adjustment for gains (losses) included in net income (4)			4.9				(.3	)
Net derivative gains (losses)		$	10.7			$	(.1	)

9.

Employee Benefit Plans

Defined Benefit Retirement Plans
Components of the net periodic benefit cost of our noncontributory defined benefit pension plans and other post-retirement benefit (“OPEB”) plans for the three months ended March 31, 2006 and March 31, 2005 were as follows:

		Pension Plans								OPEB Plans
(Millions)		2006				2005				2006				2005
Service cost		$	24.5			$	23.2			$	.1			$	.1
Interest cost			70.8				68.5				6.3				7.0
Expected return on plan assets			(102.7	)			(92.6	)			(1.0	)			(1.1	)
Amortization of prior service cost			1.4				1.3				(.5	)			(.3	)
Recognized net actuarial loss			19.3				18.6				1.8				1.5
Net periodic benefit cost			13.3				19.0				6.7				7.2

Stock-Based Compensation Plans
Our stock-based compensation plans (the “Plans”) provide for awards of stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”), deferred contingent common stock and the ability for employees to purchase common stock at a discount. At March 31, 2006, 120 million common shares were available for issuance under the Plans.

Executive, middle management and non-management employees may be granted stock options, SARs and RSUs. Stock options are granted to purchase our common stock at or above the market price on the date of grant. SARs granted will be settled in stock, net of taxes, based on the appreciation of our stock price on the exercise date over the market price on the date of grant. SARs and stock options generally become 100% vested three years after the grant is made, with one-third vesting each year. From time to time, we have issued SARs and stock options with

different vesting provisions. Vested SARs and stock options may be exercised at any time during the 10 years after grant, except in certain circumstances, generally related to employment termination or retirement. At the end of the 10-year period, any unexercised SARs and stock options expire. For each RSU granted, employees receive one share of common stock, net of taxes, at the end of the vesting period. The RSUs generally become 100% vested three years from the grant date.

All of our employees are eligible to participate in our Employee Stock Purchase Plan (the “ESPP”). Employees may contribute a percentage of their base salary through payroll deductions. Contributions are accumulated for a six-month offering period and used to purchase stock at the end of the six-month offering period (the “Purchase Date”). On the Purchase Date, stock is purchased for all participating employees based on the contributions accumulated (subject to a $25,000 annual limit per employee). The purchase price for the December 19, 2005 accumulation period is based on a five percent discount of the stock price at the end of the six-month offering period.

We estimate the fair value of stock options and awards of SARs using a modified Black-Scholes option pricing model. The fair value of RSUs is based on the market price of our common stock on the date of grant. Stock options and SARs granted in the three months ended March 31, 2006 and 2005 had a weighted average fair value of $16.50 and $10.76, respectively, using the assumptions noted in the following table:

		2006				2005
Dividend yield			.1	%			.1	%
Expected volatility			30.8	%			31.3	%
Risk-free interest rate			4.6	%			3.7	%
Expected term		4.5 years				4.5 years

We use historical data to estimate the period of time that stock options or SARs are expected to be outstanding. Expected volatilities are based on a weighted average of the historical volatility of our stock price and implied volatility from traded options on our stock. The risk-free interest rate for periods within the expected life of the stock option or SAR is based on the benchmark five-year U.S. Treasury rate in effect on the date of grant. The dividend yield assumption is based on our historical dividends declared.

The stock option and SAR transactions for the three months ended March 31, 2006 were as follows:

										Weighted
						Weighted				Average
						Average				Remaining				Aggregate
		Number of Stock				Exercise				Contractual				Intrinsic
(Millions, except exercise price)		Options or SARs				Price				Life (Years)				Value
Stock options
Outstanding at December 31, 2005			53.4			$	14.80				6.2			$	1,727.5
Granted			-				-				-				-
Exercised			(3.5	)			10.21				-				135.7
Expired or forfeited			(.2	)			19.48				-				-
Outstanding at March 31, 2006			49.7			$	15.10				6.0			$	1,693.1
Stock options exercisable at March 31, 2006			44.0			$	12.76				5.7			$	1,599.0
SARs
Outstanding at December 31, 2005			-			$	-				-			$	-
Granted			5.3				50.20				-				-
Exercised			-				-				-				-
Expired or forfeited			-				-				-				-
Outstanding at March 31, 2006			5.3			$	50.20				9.6			$	-
SARs exercisable at March 31, 2006			-			$	-				-			$	-

Cash received from stock option exercises and the related intrinsic values (the excess of the stock price on the date of exercise over the exercise price) were $35 million and $136 million, respectively, for the three months ended March 31, 2006 and $119 million and $240 million, respectively, for the three months ended March 31, 2005. In connection with these exercises, the tax benefits realized for the tax deductions from stock options exercised were $47 million and $86 million, respectively, for the three months ended March 31, 2006 and 2005. There were no SARs exercised during these periods. We settle employee stock options with newly issued common stock and generally utilize the proceeds to repurchase common stock in the open market in the same period.

The total fair value of stock options vested during the three months ended March 31, 2006 and 2005 was $134 million and $116 million, respectively. No SARs vested during these periods.

The following is a summary of information regarding stock options and SARs outstanding and exercisable at March 31, 2006 (number of stock options and SARs and aggregate intrinsic values in millions):

		Outstanding																Exercisable
						Weighted
						Average				Weighted												Weighted
						Remaining				Average				Aggregate								Average				Aggregate
		Number				Contractual				Exercise				Intrinsic				Number				Exercise				Intrinsic
Range of Exercise Prices		Outstanding				Life (Years)				Price				Value				Exercisable				Price				Value
Stock options
$0.00-$5.21			1.4				3.3			$	4.95			$	62.8				1.4			$	4.95			$	62.8
5.21-10.42			16.1				4.7				8.16				657.7				16.1				8.16				657.7
10.42-15.63			14.8				5.5				10.63				571.5				14.7				10.59				566.6
15.63-20.84			8.9				7.3				19.35				264.9				8.8				19.36				261.8
20.84-26.06			.3				8.1				21.94				8.6				.3				21.92				6.9
26.06-31.27			-				6.2				30.29				.4				-				30.50				.2
31.27-36.48			7.8				8.4				33.38				123.9				2.7				33.38				42.8
36.48-41.69			.3				9.1				38.93				3.0				-				37.28				.2
41.69-46.90			.1				9.4				42.16				.3				-				-				-
$0.00-$46.90			49.7				6.0			$	15.10			$	1,693.1				44.0			$	12.76			$	1,599.0
SARs
$46.90-$52.11			5.3				9.6			$	50.20			$	-				-			$	-			$	-

RSU transactions for the three months ended March 31, 2006 were as follows (number of units in millions):

						Weighted
						Average
						Grant Date
		RSUs				Fair Value
RSUs at December 31, 2005			.1			$	34.62
Granted			.7				50.42
Vested			-				-
Forfeited			-				-
RSUs at March 31, 2006			.8			$	50.10

For the three months ended March 31, 2006 and 2005, we recorded pretax stock-based compensation expense of $38 million and $53 million, respectively, in general and administrative expenses and related tax benefits of $13 million and $19 million, respectively. As of March 31, 2006, $110 million of total unrecognized compensation costs related to stock options, SARs and RSUs are expected to be recognized over a weighted-average period of 2.5 years.

10.

Debt

The carrying value of our long-term debt at March 31, 2006 and December 31, 2005 was as follows:

		March 31,				December 31,
(Millions)		2006				2005
Senior notes, 7.375%, due 2006		$	-			$	450.0
Senior notes, 7.875%, due 2011			448.1				448.1
Senior notes, 8.50%, due 2041			707.6				707.6
Total long-term debt			1,155.7				1,605.7
Less: current portion of long-term debt (1)			-				(450.0	)
Long-term debt, less current portion of long-term debt		$	1,155.7			$	1,155.7

On January 20, 2006, we entered into an amended and restated unsecured $1 billion, five-year revolving credit agreement (the “new credit facility”) superceding our previously existing credit facility. The new credit facility also provides for up to $150 million of letters of credit to be issued at our request, which count as usage of the available commitments under the facility. The new credit facility permits the aggregate commitments under the facility to be expanded to a maximum of $1.35 billion upon our agreement with one or more financial institutions. Various interest rate options are available under the new credit facility. Any revolving borrowings mature on the termination date of the new credit facility. We pay facility fees on the new credit facility ranging from .05% to .175% per annum, depending upon our long-term senior unsecured debt rating. The new credit facility contains a financial covenant that requires us to maintain a ratio of total debt to consolidated capitalization as of the end of each fiscal quarter ending on or after December 31, 2005 at or below .4 to 1.0. For this purpose, consolidated capitalization equals the sum of shareholders’ equity, excluding any minimum pension liability adjustment and any net unrealized capital gains and losses, and total debt (as defined in the facility). We met this requirement at March 31, 2006. As of March 31, 2006, $453 million of our commercial paper was outstanding at a weighted average interest rate of 4.72%.

In January 2006, certain of our subsidiaries entered in a one-year $45 million variable funding credit program with a bank to provide short-term liquidity to those subsidiaries. Borrowings under this program are secured by certain assets of those subsidiaries. As of March 31, 2006, there was $7 million outstanding under this program at an interest rate of 5.64%.

We expect to issue long-term debt in 2006. To mitigate the risk of increases in market interest rates, in August 2005, we entered into two forward starting swaps in order to hedge the change in cash flows associated with interest payments generated by the forecasted future issuance of long-term debt (expected to be issued between May 1, 2006 and December 31, 2006). In April 2006, we entered into two additional forward starting swaps for the same purpose. The swaps have a combined notional value of $750 million.

These transactions qualify as cash flow hedges in accordance with our accounting policy for derivatives. The hedges are considered effective if the changes in the fair value of the forward starting swaps are expected to offset changes in the future cash flows (i.e., changes in interest payments) attributable to fluctuations in the benchmark LIBOR swap curve interest rates. At March 31, 2006, and during the three months then ended, the cash flow hedges did not experience any ineffectiveness. Based on our assessment, the cash flow hedges remain effective. As a result, at March 31, 2006, we recorded an asset of $17 million (representing the fair value of the forward starting swaps), accumulated other comprehensive income of $11 million, and a deferred tax liability of $6 million. Subsequent to the issuance of the forecasted future debt, any balance remaining in accumulated other comprehensive income will be amortized or accreted into earnings.

11.

Capital Stock

On September 29, 2005 and January 27, 2006, the Board authorized two share repurchase programs for the repurchase of up to $750 million of common stock each ($1.5 billion in aggregate). During the first quarter of 2006, we repurchased approximately 3.0 million shares of common stock at a cost of approximately $151 million. As of March 31, 2006, we have authorization to repurchase up to approximately $1.2 billion of common stock remaining under the two authorizations.

In connection with the stock split described in Note 1, the Board approved an amendment to our Articles of Incorporation. The amendment increased the number of common shares we may issue to 2.9 billion shares effective February 17, 2006. This increase is in the same proportion that the shares distributed in the stock dividend increased the number of issued common shares.

12.

Dividend Restrictions and Statutory Surplus

Under regulatory requirements as of March 31, 2006, the amount of dividends that may be paid through the end of 2006 by our insurance and HMO subsidiaries to Aetna without prior approval by regulatory authorities is approximately $641 million in the aggregate. There are no such restrictions on distributions from Aetna to its shareholders.

At March 31, 2006, the combined statutory capital and surplus of our insurance and HMO subsidiaries was $4.1 billion. At December 31, 2005, such capital and surplus was $4.5 billion.

13.

Commitments and Contingencies

Managed Care Class Action Litigation
From 1999 through early 2003, we were involved in purported class action lawsuits as part of a wave of similar actions targeting the health care payor industry and, in particular, the conduct of business by managed care companies. These cases, brought on behalf of health care providers (the “Provider Cases”), alleged generally that we and other defendant managed care organizations engaged in coercive behavior or a variety of improper business practices in dealing with health care providers and conspired with one another regarding this purported wrongful conduct.

Effective May 21, 2003, we and representatives of over 900,000 physicians, state and other medical societies entered into an agreement (the “Physician Settlement Agreement”) settling the lead physician Provider Case, which was pending in the United States District Court for the Southern District of Florida (the “Florida Federal Court”). We believe that the Physician Settlement Agreement, which has received final court approval, resolved all then pending Provider Cases filed on behalf of physicians that did not opt out of the settlement. During the second quarter of 2003, we recorded a charge of $75 million ($115 million pretax) (included in other operating expenses) in connection with the Physician Settlement Agreement, net of an estimated insurance recoverable of $72 million pretax. We believe our insurance policies with third party insurance carriers apply to this matter and are vigorously pursuing recovery from those carriers. We have not received any insurance recoveries as of March 31, 2006. We continue to work with plaintiffs’ representatives in implementing the Physician Settlement Agreement and the issues that may arise under that agreement.

Several Provider Cases filed in 2003 on behalf of purported classes of chiropractors and/or all non-physician health care providers also make factual and legal allegations similar to those contained in the other Provider Cases, including allegations of violations of the Racketeer Influenced and Corrupt Organizations Act. These Provider Cases seek various forms of relief, including unspecified damages, treble damages, punitive damages and injunctive relief. These Provider Cases have been transferred to the Florida Federal Court for consolidated pretrial proceedings. We intend to defend each of these cases vigorously.

Insurance Industry Brokerage Practices Matters
We have received subpoenas and other requests for information from the New York Attorney General, the Connecticut Attorney General, other attorneys general and various insurance and other regulators with respect to an industry wide investigation into certain insurance brokerage practices, including broker compensation arrangements, bid quoting practices and potential antitrust violations. We may receive additional subpoenas and requests for information from these attorneys general and regulators. We are cooperating with these inquiries.

In connection with this industry wide review, we have, and may, receive additional subpoenas and requests for information from other attorneys general and other regulators, and be named in related litigation.

Other Litigation and Regulatory Proceedings
We are involved in numerous other lawsuits arising, for the most part, in the ordinary course of our business operations, including employment litigation and claims of bad faith, medical malpractice, non-compliance with state regulatory regimes, marketing misconduct, failure to timely pay medical claims, investment activities, intellectual property and other litigation in our Health Care and Group Insurance businesses. Some of these other lawsuits are or are purported to be class actions. We intend to defend these matters vigorously.

In addition, our current and past business practices are subject to review by, and from time to time we receive subpoenas and other requests for information from, various state insurance and health care regulatory authorities and other state and federal authorities. There also continues to be heightened review by regulatory authorities of the managed health care industry’s business practices, including utilization management, delegated arrangements and claim payment practices. As a leading national managed care organization, we regularly are the subject of such reviews. These reviews may result, and have resulted, in changes to or clarifications of our business practices, as well as fines, penalties or other sanctions.

We are unable to predict at this time the ultimate outcome of the remaining Provider Cases, the insurance industry brokerage practices matters or other litigation and regulatory proceedings, and it is reasonably possible that their outcome could be material to us.

14.

Segment Information

Summarized financial information of our segments for the three months ended March 31, 2006 and 2005 were as follows:

		Health				Group				Large Case				Corporate				Total
(Millions)		Care				Insurance				Pensions				Interest				Company
2006
Revenue from external customers		$	5,406.6			$	455.5			$	57.0			$	-			$	5,919.1
Operating earnings (loss) (1)			360.6				32.2				9.3				(21.8	)			380.3
2005
Revenue from external customers		$	4,621.3			$	458.7			$	51.3			$	-			$	5,131.3
Operating earnings (loss) (1)			370.5				29.5				4.1				(17.7	)			386.4

A reconciliation of operating earnings to income from continuing operations in the Consolidated Statements of Income for the three months ended March 31, 2006 and 2005 was as follows:

(Millions)		2006				2005
Operating earnings		$	380.3			$	386.4
Net realized capital gains, net of tax			11.5				2.9
Acquisition-related software charges (1)			(6.2	)			-
Income from continuing operations		$	385.6			$	389.3

15.

Discontinued Products

We discontinued the sale of our fully guaranteed large case pension products (single-premium annuities (“SPAs”) and guaranteed investment contracts (“GICs”)) in 1993. Under our accounting for these discontinued products, a reserve for anticipated future losses from these products was established, and we review it quarterly. As long as the reserve continues to represent our then best estimate of expected future losses, results of operations of the discontinued products, including net realized capital gains and losses, are credited/charged to the reserve and do not affect our results of operations. Our results of operations would be adversely affected to the extent that future losses on the products are greater than anticipated and favorably affected to the extent that future losses are less than anticipated. The current reserve reflects our best estimate of anticipated future losses.

The factors contributing to changes in the reserve for anticipated future losses are: operating income or loss, realized capital gains or losses and mortality gains or losses. Operating income or loss is equal to revenue less expenses. Realized capital gains or losses reflect the excess (deficit) of sales price over (below) the carrying value of assets sold and any other-than-temporary impairments. Mortality gains or losses reflect the mortality and retirement experience related to SPAs. A mortality gain (loss) occurs when an annuitant or a beneficiary dies sooner (later) than expected. A retirement gain (loss) occurs when an annuitant retires later (earlier) than expected.

At the time of discontinuance, a receivable from Large Case Pensions’ continuing products equivalent to the net present value of the anticipated cash flow shortfalls was established for the discontinued products. Interest on the receivable is accrued at the discount rate that was used to calculate the reserve. The offsetting payable, on which interest is similarly accrued, is reflected in continuing products. Interest on the payable generally offsets the investment income on the assets available to fund the shortfall. At March 31, 2006, the receivable from continuing products, net of related deferred taxes payable of $130 million on accrued interest income, was $377 million. At December 31, 2005, the receivable from continuing products, net of related deferred taxes payable of $127 million on accrued interest income, was $372 million. These amounts were eliminated in consolidation.

Results of discontinued products for the three months ended March 31, 2006 and 2005 were as follows (pretax):

						Charged (Credited)
						to Reserve for
(Millions)		Results				Future Losses				Net (1)
Three months ended March 31, 2006
Net investment income		$	88.7			$	-			$	88.7
Net realized capital gains			15.7				(15.7	)			-
Interest earned on receivable from continuing products			7.6				-				7.6
Other revenue			7.8				-				7.8
Total revenue			119.8				(15.7	)			104.1
Current and future benefits			83.6				17.4				101.0
Operating expenses			3.1				-				3.1
Total benefits and expenses			86.7				17.4				104.1
Results of discontinued products		$	33.1			$	(33.1	)		$	-
Three months ended March 31, 2005
Net investment income		$	103.8			$	-			$	103.8
Net realized capital gains			1.2				(1.2	)			-
Interest earned on receivable from continuing products			7.8				-				7.8
Other revenue			7.2				-				7.2
Total revenue			120.0				(1.2	)			118.8
Current and future benefits			86.9				28.7				115.6
Operating expenses			3.2				-				3.2
Total benefits and expenses			90.1				28.7				118.8
Results of discontinued products		$	29.9			$	(29.9	)		$	-

Assets and liabilities supporting discontinued products at March 31, 2006 and December 31, 2005 were as follows: ⁽¹⁾

		March 31,				December 31,
(Millions)		2006				2005
Assets:
Debt securities available for sale		$	2,946.1			$	3,032.3
Equity securities available for sale			54.5				43.1
Mortgage loans			641.3				644.9
Investment real estate			93.3				103.6
Loaned securities			242.9				289.3
Other investments (2)			611.6				603.3
Total investments			4,589.7				4,716.5
Collateral received under securities loan agreements			255.9				295.4
Current and deferred income taxes			89.9				88.9
Receivable from continuing products (3)			506.4				498.8
Total assets		$	5,441.9			$	5,599.6
Liabilities:
Future policy benefits		$	3,866.4			$	3,908.4
Policyholders’ funds			24.9				23.5
Reserve for anticipated future losses on discontinued products			1,085.3				1,052.2
Collateral payable under securities loan agreements			255.9				295.4
Other liabilities			209.4				320.1
Total liabilities		$	5,441.9			$	5,599.6

At March 31, 2006 and December 31, 2005, net unrealized capital gains on debt securities available for sale are included above in other liabilities and are not reflected in consolidated shareholders’ equity. The reserve for anticipated future losses is included in future policy benefits on the Consolidated Balance Sheets.

The reserve for anticipated future losses on discontinued products represents the present value (at the risk-free rate at the time of discontinuance, consistent with the duration of the liabilities) of the difference between the expected cash flows from the assets supporting discontinued products and the cash flows expected to be required to meet the obligations of the outstanding contracts. Calculation of the reserve for anticipated future losses requires projection of both the amount and the timing of cash flows over approximately the next 30 years, including consideration of, among other things, future investment results, participant withdrawal and mortality rates and the cost of asset management and customer service. Since 1993, there have been no significant changes to the assumptions underlying the calculation of the reserve related to the projection of the amount and timing of cash flows.

The projection of future investment results considers assumptions for interest rates, bond discount rates and performance of mortgage loans and real estate. Mortgage loan cash flow assumptions represent management’s best estimate of current and future levels of rent growth, vacancy and expenses based upon market conditions at each reporting date. The performance of real estate assets has been consistently estimated using the most recent forecasts available. Since 1997, a bond default assumption has been included to reflect historical default experience, since the bond portfolio increased as a percentage of the overall investment portfolio and reflected more bond credit risk, concurrent with the declines in the commercial mortgage loan and real estate portfolios.

The previous years’ actual participant withdrawal experience is used for the current year assumption. Prior to 1995, we used the 1983 Group Annuitant Mortality table published by the Society of Actuaries (the “Society”). In 1995, the Society published the 1994 Uninsured Pensioner’s Mortality table which we have used since then.

Our assumptions about the cost of asset management and customer service reflect actual investment and general expenses allocated over invested assets.

The activity in the reserve for anticipated future losses on discontinued products for the three months ended March 31, 2006 was as follows (pretax):

(Millions)
Reserve for anticipated future losses on discontinued products at December 31, 2005		$	1,052.2
Operating income			12.5
Net realized capital gains			15.7
Mortality and other			4.9
Reserve for anticipated future losses on discontinued products at March 31, 2006		$	1,085.3

16.

Discontinued Operations

On July 8, 2004, we were notified that the Congressional Joint Committee on Taxation (the “Joint Committee”) approved a tax refund of approximately $740 million, including interest, relating to businesses that were sold in the 1990s by our former parent company. Also in 2004, we filed for, and were approved for, an additional $35 million tax refund related to other businesses that were sold by our former parent company. The tax refunds were recorded as income from discontinued operations in 2004. We received approximately $666 million of the tax refunds during 2004 and $69 million in 2005. We received the final approximately $50 million payment of these refunds in February 2006, which resulted in an additional $16 million of income from discontinued operations in 2006.

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders
Aetna Inc.:

We have reviewed the consolidated balance sheet of Aetna Inc. and subsidiaries as of March 31, 2006, the related consolidated statements of income, shareholders’ equity and cash flows for the three-month periods ended March 31, 2006 and 2005. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Aetna Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 1, 2006, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

/s/ KPMG LLP

 

Hartford, Connecticut
April 27, 2006

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

Unless the context otherwise requires, references to the terms “we,” “our,” or “us” used throughout this MD&A refer to Aetna Inc. (“Aetna”) and its subsidiaries (collectively, the “Company”).

OVERVIEW

We are one of the nation’s leading diversified health care benefits companies, serving approximately 28.3 million people with information and resources to help them make better informed decisions about their health care. We offer a broad range of traditional and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life, long-term care and disability plans, and medical management capabilities. Our customers include employer groups, individuals, college students, part-time and hourly workers, health plans and government-sponsored plans. Our operations are conducted in three business segments: Health Care, Group Insurance and Large Case Pensions.

The following MD&A provides a review of our financial condition as of March 31, 2006 and December 31, 2005 and results of operations for the three months ended March 31, 2006 and 2005. This Overview should be read in conjunction with the entire MD&A, which contains detailed information that is important to understanding our results of operations and financial condition and the consolidated financial statements and other data presented herein, as well as the MD&A contained in our 2005 Annual Report on Form 10-K (our “2005 Annual Report”). This Overview is qualified in its entirety by the full MD&A.

Our income from continuing operations in the first quarter of 2006 was comparable to that in the first quarter of 2005. As described in our discussion of Health Care results below, we recorded favorable development of prior period health care cost estimates of approximately $84 million ($133 million pretax) in the first quarter of 2005. There was no significant prior period reserve development in 2006. Excluding the 2005 reserve development, our operating profit increased, primarily reflecting growth in revenue from increases in membership levels and rate increases for renewing membership as well as continued general and administrative expense efficiencies. We experienced membership growth in both our administrative services contract (“ASC”) and Risk (where we assume all or a majority of risk for medical and dental care costs) products. As of March 31, 2006, we served approximately 15.4 million medical members (consisting of approximately 34% Risk members and 66% ASC members), 13.3 million dental members, 10.2 million pharmacy members and 13.1 million group insurance members. We continue to take actions designed to achieve further medical membership growth in 2006.

Summary of Consolidated Results for the Three Months Ended March 31, 2006 and 2005:

(Millions, except per share amounts)		2006				2005
Total revenues		$	6,234.7			$	5,426.9
Income from continuing operations (1)			385.6				389.3
Net income (2)			401.7				389.3
Income from continuing operations per common share			.65				.64
Net income per common share			.68				.64

We continued to generate strong cash flows from operations in the first quarter of 2006. These cash flows funded ordinary course operating activities and also reflect voluntary contributions of $180 million to our pension plan and the receipt of approximately $50 million, representing the final refund payment from the completion of certain Internal Revenue Service audits associated with businesses previously sold by our former parent company (refer to Note 16 of Condensed Notes to Consolidated Financial Statements for additional information). We also continued our share repurchase program in the first quarter of 2006, repurchasing 3.0 million shares of our common stock at a cost of approximately $151 million.

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“FAS”) No. 123 Revised, “Share-Based Payment” (“FAS 123R”). FAS 123R requires us to expense the fair value of all stock-based compensation awards issued to employees and non-employees. Stock-based compensation expense is measured at the grant date, based on the fair value of the award and is recognized as expense over the requisite service period, which primarily is the vesting period, except for retirement eligible individuals for whom a majority of the expense is recognized in the first year. We applied the modified-retrospective approach and accordingly, all prior period financial information was adjusted to reflect our stock compensation activity since 1995. We recorded stock-based compensation expense in general and administrative expense of $25 million ($38 million pretax) and $35 million ($53 million pretax), or $.04 and $.05 per share, in the first quarter of 2006 and 2005, respectively. Stock-based compensation expense is recorded in each of our segments (primarily Health Care and Group Insurance). Refer to our segment results below and Notes 2 and 9 of Condensed Notes to Consolidated Financial Statements for additional information.

Management Update
On October 1, 2006, executive Chairman John W. Rowe, M.D., will retire. At that time, Chief Executive Officer and President Ronald A. Williams will be appointed Chairman of the Board. Dr. Rowe, formerly Chairman and Chief Executive Officer, previously announced his intention to retire from Aetna during 2006.

On April 27, 2006, Aetna announced that Alan M. Bennett, Senior Vice President and Chief Financial Officer, plans to retire in the first quarter of 2007. Mr. Bennett has been our Chief Financial Officer since 2001. We intend to conduct a comprehensive search for a replacement, and Mr. Bennett will assist us in the process to assure an orderly transition.

Acquisition of Broadspire Disability Business
On March 31, 2006, we acquired the disability and leave management businesses of Broadspire Services, Inc. and Broadspire Management Services, Inc. (collectively, “Broadspire Disability”) for approximately $160 million. Broadspire Disability operates as a third party administrator, offering absence management services, including short-term and long-term disability administration and leave management, to employers.

Discussion of Segment Results and Operating Earnings
The discussion of our results of operations that follows is presented based on our reportable segments in accordance with Financial Accounting Standards (“FAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information, and is consistent with our segment disclosure included in Note 14 of Notes to Condensed Consolidated Financial Statements. Each segment’s discussion of results is based on operating earnings, which is the measure reported to our Chief Executive Officer for purposes of assessing the segment’s financial performance and making operating decisions, such as allocating resources to the segment. Our operations are conducted in three business segments: Health Care, Group Insurance and Large Case Pensions.

Our discussion of the results of operations of each business segment is based on operating earnings, which exclude realized capital gains and losses as well as other items from net income reported in accordance with U.S. generally accepted accounting principles (“GAAP”). We believe excluding realized capital gains and losses from net income to arrive at operating earnings provides more useful information about our underlying business performance. 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 our customers and are not directly related to the core performance of our business operations. We also may exclude other items from net income to arrive at operating earnings should those other items similarly not relate to the ordinary course of our business. In each segment discussion below, we present a table that reconciles operating earnings to net income reported in accordance with GAAP. Each table details the realized capital gains and losses and any other items excluded from net income, and the footnotes to each table describe the nature of each other item and why we believe it is appropriate to exclude that item from net income.

HEALTH CARE

Health Care consists of medical, pharmacy benefits management and dental and vision plans offered on both a Risk basis and an ASC basis (where the plan sponsor assumes all or a majority of the risk for medical and dental care costs). Medical plans include point-of-service (“POS”), health maintenance organization (“HMO”), preferred provider organization (“PPO”) and indemnity benefit (“Indemnity”) products. Medical plans also include health savings accounts (“HSAs”) and Aetna HealthFund^®, consumer-directed health plans that combine traditional POS, PPO and/or dental coverage, subject to a deductible, with an accumulating benefit account. Health Care also offers network access products in select markets and other products, including medical management and data analytics services, behavioral health and stop loss insurance.

Operating Summary for the Three Months Ended March 31, 2006 and 2005:

(Millions)		2006				2005
Premiums:
Commercial Risk (1)		$	4,296.5			$	3,805.8
Medicare			429.6				247.7
Total premiums			4,726.1				4,053.5
Fees and other revenue			680.5				567.8
Net investment income			83.6				70.6
Net realized capital gains			5.7				2.0
Total revenue			5,495.9				4,693.9
Health care costs (2)			3,786.2				3,048.5
Operating expenses:
Selling expenses			221.4				183.9
General and administrative expenses (3)			899.0				863.9
Total operating expenses			1,120.4				1,047.8
Amortization of other acquired intangible assets			19.9				10.7
Total benefits and expenses			4,926.5				4,107.0
Income before income taxes			569.4				586.9
Income taxes			205.1				215.1
Net income		$	364.3			$	371.8