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Aetna, ING deal to bring new focus

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HARTFORD, Conn. -- Aetna Inc.'s $7.7 billion deal to sell its financial services and international operations to ING Groep N.V. does not address problems the company still faces in its health care business.

Those problems include rising medical costs, which resulted in lower-than-expected second-quarter earnings, continued problems in its provider relationships, and the need to place an experienced health care executive at its helm, analysts say.

The deal with ING, unveiled last week after months of negotiations, is not expected to directly affect employers that do business with Aetna U.S. Healthcare, though the sale of Aetna's other operations could focus management's attention more closely on the health care business, analysts say.

Under the definitive agreement reached with ING, Aetna will sell its financial services and international businesses for about $5 billion in cash and the assumption of about $2.7 billion in debt.

Aetna will then spin off to its shareholders a new health insurance business, to be called Aetna Inc., that will include Aetna U.S. Healthcare, group insurance and large pension plans, as well as Aetna global benefits. It will continue to be headquartered in Hartford, Conn.

Aetna's current stockholders will receive one share in the new health company and about $35 per share in cash for each share they currently hold.

Aetna U.S. Healthcare reported $459.7 million in operating earnings in 1999. Its large-pension business is a discontinued operation that is basically in runoff mode, while global benefits is a relatively small unit that handles benefits for U.S. employees working abroad for multinational firms, an Aetna spokeswoman said.

The deal provides that the holding company and its remaining subsidiaries, including the financial services and international businesses, will merge with a newly formed ING subsidiary.

Aetna Financial Services, the bulk of whose business comes from Aetna Life Insurance & Annuity Co., markets retirement and investment products to non-profit organizations, government entities, small businesses and individuals. It had $227.3 million in operating earnings before Y2K-related costs last year and $72.4 billion in assets under management.

Aetna International, which chiefly sells life insurance, health and retirement products in emerging markets, had $194.2 million in operating earnings in 1999 before Y2K-related costs.

The transaction, which is subject to regulatory and shareholder approval and other conditions, is expected to close by the end of the year.

Following the deal, Aetna will remain the nation's largest health care benefits company, with 19.5 million health members, 14.8 million dental members and 11.5 million group life insurance members.

In a statement, Aetna Chairman and Chief Executive Officer William H. Donaldson said, "We have taken an important step toward our stated goal of delivering value to shareholders, while also taking into account the concerns of our customers, employees and other constituents."

Ewald Kist, chairman of ING's executive board, said the Aetna acquisition -- along with ING's recent $6.1 billion acquisition of Minneapolis-based ReliaStar Financial Corp., which was announced in May -- "complete our strategic goal of achieving a top-10 position in the U.S. market. Building scale is absolutely essential to maintain the lead in today's financial market."

With combined U.S. premium volume of $20.2 billion and U.S. assets under management of $716 billion, the deal would put ING in the No. 1 position in the United States in terms of combined life and annuity premiums and would make it No. 6 in terms of combined statutory assets, according to ING.

The sale of these operations to ING illustrates Aetna's commitment to the health insurance business, analysts say.

"Aetna has demonstrated that they are determined to make it or break it in the health care business," said Michael LeConey, an analyst with Dirks & Co. in New York. "It's a final chapter, if you will, in Aetna's decision five years ago to focus its entire raison d'etre" on health care, and it has not been deterred by the business' difficulty and volatility, he said.

Mr. Donaldson said in his statement that "despite significant challenges, our health business is profitable, with strong cash flows. As a separate company, it should be able to bring intensified management focus on improved service to our customers and enhanced financial performance."

Referring to last week's news that Aetna's second-quarter earnings will be lower than expected, Mr. Donaldson said the results provide "an even stronger sense of urgency to make the changes necessary to get our health business on the right track."

He said Aetna is implementing several initiatives to improve the performance of its health business: They are:

* Restructuring its product portfolio to provide greater balance in its range of offerings.

* Improving relations with doctors and hospitals.

* Leveraging Aetna's information technology assets to meet constituents' demand and achieve efficiencies.

* Being more selective about the markets in which it competes.

* Realigning management and employee incentives to encourage "cross-functional" cooperation.

* Restructuring sales and broker compensation.

* Strengthening management, starting with the selection of a new CEO.

Employers that now do business with Aetna U.S. Healthcare are unlikely to encounter any problems as a result of the deal, analysts say.

While the health insurance company could use proceeds from the sale to reduce some of its debt, "the impact on the health care buyer is not going to be material, really" because the businesses were operated separately anyway, said Arun Kumar, vp with Chase Securities Inc. in New York.

"If you're an employer, you're not going to see any difference, regardless of how Aetna disposes of their financial services business," agreed William McKeever, a senior analyst with Paine Webber Inc. in New York.

The financial services business is unlikely to be missed by employers that obtain health care benefits through Aetna, because there has been relatively little cross-selling.

"If an employer has thought about going to Aetna as a single source, obviously they've lost that opportunity," but few companies fit into that category anyway, Mr. McKeever said.

"There wasn't a whole lot of synergy between the two operations to begin with," agreed Douglas L. Meyer, senior director at Fitch IBCA in Chicago.

On the other hand, employers that do business with Aetna's financial services operations may be happier with ING, said John L. Ward, chairman of the Cincinnati-based Ward Financial Group. Aetna had been preoccupied with its problems with Wall Street, and "they obviously had been intending to invest their energy and capital resources into the health business."

Now, Mr. Ward said, these financial services clients "will have a slightly better chance of getting better service and a better product than had they continued forward with Aetna."

One consultant suggested, however, that the deal might have a negative impact on employers.

"Aetna will now have to survive only on its health care operations, which is probably the least financially successful of all their operations," said Richard Sinni, group and health care practice leader for Watson Wyatt Worldwide in New York.

As a result, "I would imagine the impact on employers would be less positive than we would expect," said Mr. Sinni. Because of higher medical costs, Aetna may have to go back to employers and seek higher rates, he said.

Others say employers will indirectly benefit from Aetna's exclusive focus on health care.

Right now, "management is really torn between a multiple group of products that really don't relate to one another all that well," said health care analyst Doug Sherlock of the North Wales, Pa.-based Sherlock Co.

Initiatives such as developing Internet capabilities and managing administrative expenses demand a lot of attention, Mr. Sherlock said. By divesting the financial services business, "the management team will be able to focus all their attention on the very tough business of managing health care costs," he said.

Aetna also will focus on its search for a top executive for its health care business. Michael Cardillo resigned as president of Aetna U.S. Healthcare in May. In addition, Richard L. Huber resigned as chairman, president and CEO in February, and was replaced by Mr. Donaldson, who is a co-founder of the investment banking firm Donaldson, Lufkin & Jenrette.

"We've said we have an active search under way. We've narrowed the field and we're proceeding to get a candidate on board as quickly as possible," said the Aetna spokes-woman.