Aetna seeks financial flexibility through acquisitions
In late July, the Aetna Life & Casualty Company sent a memo to its employees. It told them the company was deferring ''a number of noncritical expenditures,'' and would hold down future hiring. The recession and competition, the company said, dictated such moves.
The cost reductions have come at a time when the company has spent $733 million buying companies not directly involved in the insurance business.
These two moves by Aetna, the nation's largest all-line insurer, reflect the direction the company is moving. It currently faces tough times in its basic business -- providing property and casualty, as well as commercial insurance.
The acquisitions, according to chairman John H. Filer, are designed to give the company ''financial flexibility.'' With control of $40 billion in assets, obtaining financial flexiblity is not easy. Nonetheless, Mr. Filer says this is a company goal.
Within a two-week span at the end of July, Aetna paid $115 million for an 86 percent interest in Federated Investors Inc., a Pittsburgh investment-management-services firm. It also paid $185 million for a 40 percent interest in Samuel Montagu & Co. Group, a British merchant bank. Earlier this spring, at a cost of $433 million, Aetna acquired Geosource Inc., a Houston-based oil-services company.
''All of this,'' Mr. Filer said in an interview, ''. . . I think you can refer to in a way as positioning the company with some flexibility for the future, because I'm not smart enough to know what's going to happen in the various insurance markets and the various financial markets.''
By acquiring companies involved in the fast-changing financial-services world , Mr. Filer said Aetna would be able to ''take advantage of opportunities'' that crop up as financial services evolve. However, unlike other insurers that have bought companies that have direct dealings with the public, Aetna's acquisitions mainly deal with institutional customers.
So far, securities analysts have been upbeat about the purchases over the long term. Jerry Lewinsohn, a vice-president of Merrill Lynch, Pierce, Fenner & Smith Inc., said ''it shows the company is forward-thinking and wants to be a major presence in financial services as it evolves, and that is very positive.'' But, he adds, the investments are not ''such big bets'' as to portend problems for the company should they not work out.
Myron Piccoult, an analyst at Oppenheimer & Co., a brokerage firm, said the purchase of Montagu was a ''bold stroke,'' placing Aetna firmly in the commercial financial-services field.
Over the short term, some analysts raised eyebrows. They said Aetna was paying too much for Geosource, since Geosource company earnings had peaked in 1981. And Aetna stock, which had a 52-week high of $48.25 a share fell to its current low level of $33 a share.
Still others said Aetna's stock was down because of the generally depressed price of insurance companies' stock.
The fact that the acquisitions have come so close together should not be construed as indicating the ''pace of change'' had picked up at Aetna, Mr. Filer said. Rather, he said the acquisitions all came together at this point because of ''happenstance.'' Opportunity knocked and Aetna answered.
For example, he said the depressed price of Geosource stock made it a good buy today -- but not a year ago. Aetna had been an original venture-capital investor in Geosource and owned 29 percent of the company. However, ownership in this minority position, Mr. Filer said, had disadvantages, because Aetna couldn't use Geosource tax benefits or help the company to grow more.
''Over time,'' a phrase frequently used by the philosphical Mr. Filer, he expects Geosource to be an excellent investment because Geosource is ''on the leading edge'' of technology in the oil-services business. With Aetna as its parent, Mr. Filer says, Geosource now can ''have a more aggressive balance sheet'' -- a greater debt-to-equity ratio. This should help it grow when better times return to the oil patch.
And, in the case of Samuel Montagu, Mr. Filer says Aetna was looking for a year and a half for ''the right kind of company'' to help position it in the international markets. Montagu, a merchant bank, is partly owned by Midland Bank of London, the third-largest bank in the United Kingdom. Midland also owns Crocker National Bank in California and Trinkaus and Burkhardt, West Germany's largest private bank. Thus Montagu gives Aetna ties to large commercial banks used to dealing in the international arena.
Finally, Filer said, the Federated Investors deal makes sense because the company manages a substantial amount of funds -- $27 billion -- and Aetna likewise is in the business of managing money and providing financial services. Federated runs mutual funds, including money-market funds, and gears many of its services toward bank trust departments.
''I can see over time the possibility of Federated providing to bank customers products . . . that we produce,'' Filer said. Federated, with ties to some 1,400 to 1,500 bank trust departments, might be helpful to Aetna as such financial services develop, he noted.
The company chairman said Aetna's goal was to have 20 percent of its operating earnings coming from non-insurance business. Currently, about 9 percent of Aetna's earnings come from the diversified business division. He says that he expects earnings will grow substantially in the companies in that group in the future, and that it is doubtful Aetna will make any more major acquisitions. By 1985, Mr. Filer expects earnings from this group will be in full bloom, especially since Satellite Business Systems, of which Aetna is a partner, is expected to become profitable in 1984. For the first six months of this year, SBS lost $10 million.
Mr. Filer is likewise optimistic that the property and casualty side of the business will turn around. With interest rates high, insurers felt they could offer insurance for less than cost because the investment income from the premiums would provide them with a profit. Thus the business has been very competitive. Aetna has tried to raise its rates, and lost some of its market share as a result.
Between market-share and operating losses, Aetna had a negative cash flow of casualty business, not counting investment income. Investment income from the $1 .8 billion in premiums paid to it provided after-tax earnings of $306 million in the first six months. In order to cut its operation losses, Aetna has tried to cut expenses.
However, Mr. Filer is convinced the nation's other insurers will be forced to raise their rates. He expects some smaller insurance companies will be forced out of business this year as investment income drops.
''They aren't household names,'' he says. ''I won't tell you who I think they are.'' The failures should force the industry to reexamine its policies, he says.
Even though Aetna is saddled with problems in the property and casualty business, Mr. Filer said Aetna's Employee Benefits Division, which sells group-life, health, and pension plans, is ''going gangbusters.'' The life insurance part of the business, however, has been flat.