From Near Casualty To Hot Property

It's a slow-growth business with paltry returns, soft pricing, vicious competition. So how come such smart-money types as Henry Kravis, Sandy Weill, and the Tisch brothers are so eager to get a bigger piece of it?

They're the bidders in an auction for the property and casualty insurance division of Hartford-based Aetna Life & Casualty Co., which is now refocusing on managed health care. Bedeviled for years by immeasurable potential environmental losses and battered by such recent natural disasters as Hurricane Andrew and the Northridge (Calif.) earthquake, the underperforming unit, which has $5 billion in revenues, has been on the block since early this year. But interest has suddenly surged. Sources think a deal could be imminent. "It amazes me that a company you couldn't give away three months ago has now turned into the hottest girl at the prom," says Oppenheimer Inc. analyst Alice D. Schroeder.

What's changed? For one thing, Aetna has begun cleaning up its property/casualty business. In July, it bolstered reserves for future environmental claims by $750 million, to $1.2 billion. Then, the absence of huge catastrophic losses and environmental claims in the third quarter led to a 176% increase in property/casualty earnings, to $102 million.

HAPPY SHAREHOLDERS. Each of the bidders has strong reasons to pick up the property. Adding Aetna to the Tisch-backed CNA Financial Corp., which bought Continental Insurance Co. in 1994, would make CNA the dominant force in commercial insurance. Sanford I. Weill's Travelers Group, which has a knack for streamlining troubled multiline insurers, would wring more profits out of Aetna's high-cost operation.

Kohlberg Kravis Roberts & Co., emboldened by its successful 1992 investment in American Re Corp., is making a big bet on insurance, believing the business is undervalued. It wants to use leverage to buy not only the Aetna unit but Xerox Corp.'s $2.7 billion insurance businesses. KKR is appealing to the emotions of Aetna's property/casualty managers by offering to lead a buyout that would largely preserve the existing franchise. Aetna executives are said to be leery of a leveraged deal. Others circling Aetna include Jeff Greenberg, son of American International Group Chief Executive Maurice Greenberg and a former AIG executive.

Aetna CEO Ronald E. Compton is known to want a deal before the end of the year and is expected to ask for final offers within the next couple of weeks. The company's stock has run up to $75 from $48 late last year on assumptions that the property and casualty business would be sold this year. People familiar with the negotiations say Aetna wants a price above the $3 billion book value.

Unfortunately for Aetna, all the prospective purchasers are known as bottom-fishers and tough negotiators. They are likely to want financial guarantees from Aetna to cover potential future losses. But if Compton can convince the bidders they can't afford to pass up such a choice asset, Christmas could come early this year in Hartford.

The Likely Bidders

KKR: The investment group, which bought Aetna's reinsurance business three years ago, would combine Aetna's business with Xerox' insurance holdings.

TRAVELERS: Sandy Weill may be looking to marry Aetna's property and casualty unit with a revamped Travelers, generating significant cost savings.

CNA: This Tisch Brothers operation already has a big deal under its belt, the 1994 purchase of Continental for $1.1 billion.

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