The Floodwaters Rise Around Aetna

`I'm very much a ready-aim-fire guy," says Ronald E. Compton, chief executive officer of Aetna Life & Casualty. "I am going to change what I can see needs changing." Compared with former Aetna CEOs who ran the Hartford insurer unchanged for decades, Compton, 62, has been a dervish, leading a series of restructurings and "strategic reviews" over the past five years.

Yet all that hasn't much helped the country's largest publicly owned insurer. Excluding special charges and capital gains and losses, 1994 earnings were no better than in 1990, when Compton started restructuring. Last year's profits represented a return on equity of 7.5% vs. 13.6% for the industry. Excluding catastrophe losses, 1995's first-quarter results were nearly the same as 1994's. "The company is still unable to generate a steady stream of growing earnings," says Peter Azcue of Value Line Inc.

Aetna's property and casualty business is producing middling results. Potentially crippling claims for environmental liability continue to dog the company. Aetna's stock has been strong lately, but analysts attribute that to company statements that it may soon quantify the cost of those claims. Still, the stock has trailed most other major insurers' since April, 1990. Aetna's is up just 24%, while Standard & Poor's multiline insurance index has risen 69%.

BREAKUP? Time may be running out for Aetna. The industry is consolidating fast. Travelers fell prey to financier Sanford I. Weill two years ago, insurer Continental Corp. was bought by CNA Financial earlier this year, and Kemper agreed in April to a buyout from Zurich Insurance Group. Without some big improvements, Aetna could face a similar fate or, more likely, drastic restructuring or a breakup. Industry insiders say Aetna has done an analysis of its breakup value. Compton, a 40-year Aetna veteran, won't comment on the company's plans. But he does say: "The fact is, anybody--a board or a CEO--is going to have to consider anything."

Compton's own position may not be quite rock-solid. Aetna's board cut his 1994 bonus 45%, from $550,000 to $300,000, while his salary remained flat, at $775,000. Four other top execs had their bonuses slashed. A more significant sign of a possible power shift was the arrival, on Feb. 6, of Richard L. Huber, 58, as vice-chairman for strategy and finance, a new position.

Huber, whom the company says Compton recruited, is a tough, colorful, make-waves operator with a background in banking and on Wall Street--one of several bankers who have recently moved into senior insurance positions. Formerly Continental Bank Corp.'s vice-chairman, Huber led a restructuring at Continental before the bank's $2 billion sale to Bank of America. "We needed an industrial-strength financial and strategic mind," says Compton. Thomas C. Theobold, a former chairman of Continental, says Huber is "not a traditional insurance executive. I view it as a very positive sign for Aetna to have hired him. He brings a fresh mind. He looks very aggressively at what makes money and what doesn't." Huber leaves no doubt that he thinks Aetna has been a subpar performer. While Aetna has many choice assets, Huber says, "some of them haven't been worked nearly hard enough."

No matter how their relationship sorts out, Compton and Huber have their work cut out for them. Environmental claims are a top priority. Aetna already has reserves of $436 million for potential claims, but analysts believe the additional hit could reach $1 billion and wipe out most--if not all--of 1995's expected earnings of $660 million.

The company also faces fresh challenges to its core health-care franchise. Health care contributed 75% of profits last year. Now, Aetna has to compete with national health-maintenance organizations and other providers--and it's not faring well in price comparisons. "They're a top-tier competitor," says Helen Darling, who manages health-care planning for Xerox Corp. "But they've tended to be at the high end of costs." Aetna is trying to cut them by shifting health-care-plan members to managed care. But building a network of providers would cost about $200 million, according to James W. McLane, head of Aetna Health Plans. Compton says earnings in the health-care business will be shaved 15% this year.

"PROBLEMS BEHIND US." That means the lackluster property-casualty division, which earned just $60 million in 1994 on $5.3 billion in revenues, will have to shine this year. Gary G. Benanav, head of that operation, managed a $100 million earnings swing in Aetna's international business before taking over property-casualty in late 1993. He has already cut annual expenses by $120 million and cut over 2,000 jobs, while shifting the underwriting focus away from volume to profitability. But property-casualty lost more than $200 million in each of the previous two years, and that sector of the industry continues to suffer from fierce price competition.

On the plus side, Aetna is cleaning up its once-embattled pension and life-insurance business. The company took an $825 million charge in 1994 for losses associated with guaranteed investment contracts. Also, it set up a $1.3 billion reserve for future losses. But sales of life insurance were up 67% in 1994, and the life and annuity business saw profits rise 43%, to $159 million. Aetna has whittled its portfolio of troubled real estate and mortgages to $13 billion, down from $23 billion four years ago. "We have put the bulk of our real estate problems behind us," says Executive Vice-President Daniel P. Kearney.

Overall, Aetna is working on pruning low-performing businesses. The insurer recently announced plans to sell its Aeltus investment-management subsidiary. And the company is trying to bolster businesses it runs well, such as health care and life insurance. But with cash-hungry investors having already gobbled up some of Aetna's rivals, the pace of improvement needs to quicken. The market doesn't tolerate inefficiency for long. Just ask Travelers. Just ask Kemper.

What Aetna Needs to Fix


Mass of claims stemming from coverage written decades ago needs to be quantified. Possible charge: $1 billion.


Up to $200 million must be spent annually for the next few years to build a network of managed-care providers.


Expenses must be trimmed further, and loss ratios must be reduced at this underperforming unit.


The $13 billion real estate portfolio must continue to be reduced. About 19% is considered troubled.


    Before it's here, it's on the Bloomberg Terminal.