Aetna Inc.

151 Farmington Avenue
Hartford, Connecticut 06156-0001
U.S.A.
Telephone: (860) 273-0123
Toll Free: (800) 872-3862
Fax: (860) 273-3971
Web site: http://www.aetna.com

Public Company
Incorporated: 1982 as United States Health Care
Systems, Inc.
Employees: 27,548
Total Assets: $40.95 billion (2003)
Stock Exchanges: New York
Ticker Symbol: AET
NAIC: 524114 Direct Health and Medical Insurance Carriers; 524113 Direct Life Insurance Carriers

Specializing in managed healthcare, Aetna Inc. is one of the largest providers of health insurance and related benefits in the United States. In addition to health insurance, the company offers dental, pharmacy, group life, disability, and long-term-care products. Aetna offers plans to businesses large and small, in all 50 states. Nationwide, the company's networks include more than 362,000 primary care and specialty physicians, 3,626 hospitals, more than 62,000 dental practices, and more than 62,000 participating pharmacies. Aetna health plans cover about 13 million individuals, and its dental plans have nearly 11 million members. Of the members in Aetna's health plans, 36 percent are enrolled in health maintenance organizations (HMOs), 34 percent in preferred provider organizations (PPOs), 17 percent in point-of-service (POS) plans, and 11 percent in traditional indemnity plans. The company started out in the mid-19th century as a life insurer and then slowly evolved into a multiline insurer. Between 1995 and 2000, however, Aetna shed the bulk of its operations that fell outside of health insurance and related group benefits. It also completed several acquisitions during this period to build its health business into a national player.

Establishment by Prominent New England Lawyer: 1850s–60s

Aetna was founded in Connecticut in 1853 as the Aetna Life Insurance Company. Aetna Life was originally formed as an affiliate of the older Aetna Insurance Company, which specialized in fire insurance (and was named after Mt. Etna, the Sicilian volcano), and it profited from its association with Aetna's reputation for reliability and speed in paying claims. However, a new state insurance regulation passed in nearby New York state in 1849, and strengthened in 1853, prohibited the same company from providing both fire and life insurance. In 1853 the Connecticut legislature granted a petition for the separate incorporation of the Aetna Life Insurance Company.

Aetna Life's founding president, Eliphalet Bulkeley, originally divided his time between practicing law and developing the fledgling life insurance firm. He was also active in the formation of the Republican Party in Connecticut, starting a long tradition of political activism by Aetna leaders. Bulkeley guided Aetna through its difficult first years, when new insurance laws in some states required capital deposits beyond the stockholders' resources, hindering Aetna from doing business in those states. The depression of 1857 further threatened the firm's financial stability, but Aetna survived in the face of multiple bank closings. During this period the company regained its financial footing in part by hiring its first midwestern agent, a Connecticut man, who opened an office in Wisconsin to serve the burgeoning market in those states.

The year 1861 was important for Aetna for two reasons: the Civil War began and Aetna modified its form of ownership. Both events profitably affected the company's growth. Seeking security during the uncertain war years, many people bought life insurance policies for the first time. In addition, Aetna modified its form of investor ownership to permit policyholders to control their own funds in a separate mutual department that operated within the overall management structure. Originally, Bulkeley had resisted the mutual plan that placed ownership in the hands of policyholders. He disliked the speculative nature of dividend payment and could not countenance an approach to management that divided responsibility among all policy-holders.

Pressure from the public and from competing insurance companies helped change Bulkeley's mind. The result was the creation of a mutual department whose accounting system was separate from that of management. Within this department, policyholders controlled their own funds and received dividends, but did not vote for the management of the company. The firm as a whole continued as an investor-owned company with all the efficiency of management Bulkeley believed was inherent in that arrangement. Partly because of this revision of the ownership structure, in just five years, from 1861 to 1866, Aetna jumped from 15th among 40 life insurance companies nationwide to fifth among 80.

Policyholder Resistance to Changes in the Insurance Industry in the Late 19th Century

Bulkeley died in 1872 and was succeeded by Thomas O. Enders, who had served as both a clerk and secretary for the firm. Bulkeley had presided over Aetna during the speculative postwar years, and had maintained careful control of the risks the company assumed. The 1870s was a period of nationwide economic crisis, and Enders was hard-pressed to keep the firm alive, despite its earlier successes. Not only did he have to contend with a nationwide depression that began in 1873, but he also was burdened with the disastrous results of a major change in the method of premium payment made toward the end of Bulkeley's presidency. Until then, Aetna and most other insurance companies had accepted interest-bearing notes as half payment for premiums. In the wake of questions from the state insurance commissioner about the booking of these notes as assets, and the negative press elicited by the commissioner's report, Aetna management decided to start requiring full cash payment for premiums. Although Aetna was innovative in this change and most other insurance companies soon began to follow the new practice, the firm's policyholders were outraged. Many canceled their policies, and new policyholders were not forthcoming. In desperate straits following the policy change and weakened by the financial crisis of the 1870s, Aetna steadily declined. Enders resigned in 1879.

Aetna passed back into family hands when Morgan G. Bulkeley, Eliphalet Bulkeley's son, took over leadership of the firm, a position he was to retain for the next 43 years. Although Morgan Bulkeley had been a director on the Aetna board since his father's death, he had chosen to apprentice as a dry goods merchant rather than rise through his father's firm. His primary interest was in politics. He was active in the state Republican Party his father had helped to form. By 1879 he had been a councilman and alderman and was successfully running for mayor of Hartford. He subsequently became governor of Connecticut and then a U.S. senator. Bulkeley maintained firm control over both his government office and his corporate office. While governor, Bulkeley loaned the state of Connecticut $300,000 from Aetna's funds during a period of financial need. In 1911 Bulkeley lost his senate seat and returned full-time to his position with Aetna.

Moving into the 20th Century: Advancing Through Diversification and Innovation

Aetna did very well under Morgan Bulkeley. Its total assets increased from $25.6 million in 1879 to $207 million in 1922, while premium income increased more than 20-fold during the same period. The number of employees grew from 29 to 2,000. Aetna's success was in large part due to innovations in forms of insurance. The first years of Bulkeley's presidency were spent getting the ailing company back on its feet, but in the 1890s Aetna made its first move to diversify, initiating a period of rapid expansion. In 1891, under its existing charter, Aetna began to write accident insurance, and in 1899 added health insurance. In 1893 its charter was expanded, allowing the company to become a pioneer in the development of liability insurance. In 1902 Aetna opened a separate accident and liability department to handle employers' liability and workmen's collective insurance. Eager to profit from the rapidly growing market for automobile insurance, in 1907 Aetna management transformed the liability department into Aetna Life's first affiliate, the Aetna Accident and Liability Company.

For a few years, this new company issued all the new forms of insurance Aetna offered, but soon further diversification was necessary. In 1912 Aetna offered the first comprehensive auto policy, providing all kinds of auto insurance in one contract, and in 1913 a second Aetna affiliate was formed, the Automobile Insurance Company. The charter of this second affiliate also allowed it to handle other insurance lines including loss of use, explosion, tornado and windstorm, leasehold, and rent. In 1916 Aetna Auto began to offer marine insurance, a line that was greatly broadened during World War I. Meanwhile, the Aetna Accident and Liability Company was expanding its business in fidelity and surety bonds, and in 1917 changed its name to the Aetna Casualty and Surety Company. In 1913 Aetna formed a group department to sell group life insurance. Group disability policies were offered for the first time in 1919.

Company Perspectives:

Aetna is dedicated to helping people achieve health and financial security by providing easy access to safe, cost-effective, high-quality health care and protecting their finances against health-related risks.

Building on our 150-year heritage, Aetna will be a leader, cooperating with doctors and hospitals, employers, patients, public officials and others to build a stronger, more effective health care system.

Streamlining Procedures Under a New President in the 1920s

When Morgan Bulkeley died in 1922, Morgan Bulkeley Brainard, grandson of Eliphalet Bulkeley, succeeded his uncle as president. Unlike his uncle, Brainard was a company man. Following college, law school, and two years in a law firm, he joined Aetna as assistant treasurer, later becoming treasurer and then vice-president. According to Richard Hooker's Aetna Life Insurance Company: Its First Hundred Years, A History, Brainard described his uncle as having "built up an unusually strong organization by the sheer force of his personality." Brainard, by contrast, intended to initiate a new style of leadership. "Where Governor Bulkeley could bring men around him and have them work for him by the inspiration of his presence, I cannot. I have got to surround myself with as able a group of men as I possibly can." Accordingly, Brainard focused on efficiency of administration, concentrating particularly on relations and communications with agents in the field. He streamlined procedures, regularized paperwork, and reduced the costs of doing business. The new approach worked. In 1922 life insurance in force was $1.3 billion. By 1929 assets amounted to $411 million and life insurance in force to $3.79 billion. In 1924, Aetna also had acquired a third affiliate, the Standard Fire Insurance Company, which further strengthened its position.

Such expansion, however, did not come without costs. The Automobile Insurance Company, one of Aetna Life's affiliated companies, had contributed to the spectacular increases of the 1920s. In 1922 the affiliate's premium income reached $11 million; in 1923, $19 million; and in 1924, premium income reached $30 million. The affiliate's success, however, was not grounded in a solid financial base. In March 1926, Brainard discovered that the Automobile Insurance Company had understated its liabilities and taken on more business than it could handle. The marine division of the affiliate had expanded swiftly during the war years, but had exercised poor judgment in the selection of risks, especially following World War I, when solicitation of marine business should have been curtailed. The Automobile Insurance Company also had gained new business by assuming risks from other companies. Brainard rapidly retrenched. He cut business drastically, resulting in premium income of just $7.9 million in 1927 for the auto affiliate. Reserves were increased to cover liabilities and future underwriting losses.

This crisis during the mid-1920s helped prepare Aetna for the economic shock of the Great Depression. Brainard had, in effect, stemmed the tide of financial speculation within Aetna while the rest of the business community continued to speculate until the stock market crash of 1929. As a result, during the worst years of the Depression, Aetna's income dropped by only a little more than 10 percent. Cautious management kept the company solvent. Dividends were not paid between 1932 and 1934, but no Aetna employees were dismissed. In 1929 only 11.7 percent of Aetna's assets were in common stock, and almost half of that in the stock of Aetna affiliates, another condition that helped Aetna survive during the 1930s. Although the company did suffer because it had assumed growing numbers of farm mortgages that defaulted during the Depression, Brainard's careful business practices kept the losses to a minimum. Aetna also opened up two new lines of business during these difficult years: pensions in 1930 and group hospitalization policies in 1936.

Renewed Expansion During the War Years

World War II finally helped pull Aetna and the nation out of the Depression. The war gave Aetna several opportunities to develop new types of insurance coverage. In cooperation with other insurers, Aetna issued a bonding contract for $312 million that insured the construction of seven aircraft carriers. Aetna also was involved in insuring the production of the atom bomb under the Manhattan Project, a uniquely challenging actuarial task because much of the information was classified. In addition, Aetna was centrally occupied with developing its lines of employee group insurance during these years. Ordinary life insurance premiums remained almost steady during World War II, but group insurance rose dramatically, increasing overall premium income by almost 65 percent. Group insurance premiums declined quickly after the war with the switch to a peacetime economy, but Aetna's prewar experience with group insurance helped the company rally with relative ease.

In the postwar years, Aetna continued to diversify cautiously. The company explored the possibilities of insurance coverage for air travel, became involved in several large bonding issues, and became a pioneer in the area of driver's education. In 1955, two years after Aetna's centennial, Brainard resigned the position of president to become Aetna's first chairman. Vice-President Henry Beers succeeded him as Aetna's fifth president.

Key Dates:

1853:: Aetna Life Insurance Company is incorporated in Connecticut, with Eliphalet Bulkeley serving as founding president.
1891:: The company diversifies into accident insurance.
1899:: Aetna enters the field of health insurance.
1913:: A group department is formed to sell group life insurance.
1936:: The first group hospitalization policy is offered.
1960:: Aetna enters the international market by purchasing Toronto-based Excelsior Life Insurance Company.
1967:: Aetna Life & Casualty Company is created as a holding company, with these subsidiaries: Aetna Life Insurance Company, Aetna Casualty and Surety, Standard Fire Insurance, and the Automobile Insurance Company.
1968:: The company's stock is listed on the New York Stock Exchange.
1973:: A health maintenance organization (HMO) subsidiary is created.
1981:: Aetna reorganizes into five insurance divisions: employees benefits division, personal/financial/security division, commercial insurance division, American Re-Insurance Company, and international insurance division.
1992:: American Re-Insurance is divested for $1.31 billion.
1996:: Aetna sells its property-casualty operations to Travelers Group for $4.1 billion; company pays $8.9 billion for HMO provider U.S. Healthcare, Inc., which is renamed Aetna U.S. Healthcare Inc.; parent company Aetna Life & Casualty is renamed Aetna Inc.
1998:: The U.S. individual life insurance business is sold to Lincoln National Corporation.
1999:: Aetna acquires the healthcare business of the Prudential Insurance Company of America.
2000:: Aetna Inc. spins Aetna U.S. Healthcare off to its shareholders; the remnants of Aetna—the company's international and financial services units—are acquired by ING Groep N.V. for about $7.75 billion; Aetna U.S. Healthcare is renamed Aetna Inc.

With Beers's inauguration, the long history of family control ended and a new era of shorter presidencies began. In 1962 Beers became chairman and J.A. Hill took over as president. One year later Olcott D. Smith succeeded Beers as chairman. In 1972 John H. Filer succeeded Smith as chairman, and Donald M. Johnson was named president in 1970. In 1976 William O. Bailey succeeded Johnson. Through these years of fairly rapid changes in management, the position of chairman and chief executive officer gained ascendancy over that of president and chief operating officer.

Going International in the 1960s

In 1960 Aetna entered the international market with the purchase of Excelsior Life Insurance Company of Toronto. Six years later Aetna entered into an international cooperation agreement with Italy's Assicurazioni Generali S.p.A. through which each company provided reciprocal services to the other's clients while abroad. To facilitate flexible management of these expanding operations and allow diversification into non-insurance fields, Aetna Life & Casualty Company, a holding company, was created in 1967 with subsidiaries Aetna Life Insurance Company, Aetna Casualty and Surety, Standard Fire Insurance, and the Automobile Insurance Company. Later that same year Aetna purchased the Participating Annuity Life Insurance Company, becoming the first major insurance firm to enter the variable annuity market. In 1968 Aetna was first listed on the New York Stock Exchange.

In the late 1960s Aetna experienced a sharp drop in earnings, a trend that reflected an industrywide increase in claims. The decline was reversed in the early 1970s, in part because of nationwide decreases in losses and increases in premiums and in part because of Aetna's move to control costs and concentrate on the most profitable lines of insurance. Nevertheless, rapid diversification into non-insurance fields later in the same decade undermined earlier gains. Particularly ill-fated acquisitions were Geosource Inc., an oilfield services concern, and Satellite Business Systems, a communications firm.

Diversification Followed by Reorganization in the 1970s

In 1972 Chairman Smith initiated a management change that resembled Brainard's initiation of his new leadership style 50 years before. In place of administration by one man, Smith introduced the "corporate office" approach, a consensual relationship of the four top managers—chairman, president, and two vice-presidents—with the chairman still slightly dominant. Corporate structure also was reorganized. In addition, in a move that would become much more important in subsequent decades, Aetna created a health maintenance organization (HMO) subsidiary in 1973.

In 1981 the company reorganized its operations into five insurance divisions. The employees benefits division offered group insurance, healthcare services, and pension and related financial products to business, government units, associations, and welfare trusts. The personal/financial/security division provided automobile and homeowner insurance, life and health insurance, and retirement funding and annuity products to individuals, small businesses, and employer-sponsored groups. The commercial insurance division marketed property-casualty insurance and bonds for businesses, government units, and associations, including workers' compensation. The American Re-Insurance Company reinsured commercial property and liability risks in domestic and international markets. The international insurance division handled insurance and investment products in non-U.S. markets. The activities of these five insurance sectors were supported by the operations of a financial division that managed all of the firm's investment portfolios.

Back to the Insurance Basics in the 1980s

Income declined in the early 1980s. In 1981, hoping to lead industrywide price increases, Aetna raised commercial insurance prices, a mistimed move that cost the company as much as 10 percent of its business. In addition, Aetna was forced to lower its 1982 statement of earnings by 39 percent, in response to a ruling by the Securities and Exchange Commission that disallowed Aetna's practice of booking future tax credits as current earnings.

In 1984 James T. Lynn became chairman and CEO. Like his predecessors in the Bulkeley family, Lynn was active in Republican politics when he accepted the post with Aetna. Trained as a lawyer, he served as secretary of Housing and Urban Development from 1973 to 1975, and as director of the Office of Management and Budget from 1975 to 1977. Lynn implemented a policy of prudent retrenchment, selling subsidiaries that were not performing well and emphasizing Aetna's longstanding priority on insurance. This policy once again proved profitable for Aetna: earnings more than doubled from 1984 to 1985, with record increases in 1986 and 1987.

Ronald E. Compton became president of Aetna in 1988. Earnings declined by 23 percent from the previous year, a downturn reflecting increased competition in the commercial property-casualty business, rising loss costs in auto and homeowners insurance lines, and losses in its highly competitive multinational corporations operations. In 1989 the decline continued at the rate of 5 percent from the previous year, with commercial property-casualty insurance lines affected by two natural disasters, Hurricane Hugo and the San Francisco Bay area earthquake.

New Challenges from Changing Economy in the Early 1990s

In the fluctuating economic climate of the 1990s, Aetna began to redraw its traditional market sector, as well as to reorganize its three domestic insurance divisions into 15 strategic business units. In response to several state legislatures' efforts to roll back or otherwise restrict the rise in auto insurance rates, the company attempted to pull out of both Pennsylvania's and Massachusetts' auto insurance markets, although such efforts drew resistance from both state regulators and consumers. The company would withdraw from the auto insurance business in 13 other states over the next few years. The company also began to curtail its expansion of personal property and casualty insurance markets in several states, and cut back personal mortgage insurance early in the decade.

While pulling out of the auto insurance market, the company was investing heavily in the growing field of managed health-care insurance. By 1990 Aetna Life & Casualty had spent more than $400 million to establish its own HMO, a profitable venture that helped buoy net income for that year to $614 million, against a slight drop in overall earnings. Losses taken against plummeting real estate prices in the northeast further eroded earnings in 1991 because of the company's extensive property holdings. Net income for 1991 was reported at only $505 million, the downturn aggravated by property claims resulting from Hurricane Bob.

A further sign that Aetna was serious in its efforts to reposition itself by narrowing its focus to health and life insurance and financial services came in November 1991, when the company announced that Aetna President Ronald E. Compton would be appointed chairman upon the retirement of James T. Lynn in early 1992. The company also divested itself of its American Re-Insurance subsidiary in September 1992, selling it to American Re Corporation for $1.31 billion and raising much needed cash. In an effort to retain customers lured away from insurance by mutual fund offerings, Aetna Life & Casualty began offering five mutual funds on the retail marketplace in September 1992.

Despite a slowly improving national economy, the continuing deterioration of the company's mortgage loan portfolio would force Aetna to engage in further streamlining efforts, and in June 1992 the company laid off 10 percent of its workforce. Plagued by natural disasters and bad weather for the remainder of the year—the winter storms during the fourth quarter alone generated almost 18,000 claims totaling $118 million—as well as a $55 million charge for withdrawing its automobile insurance services from Massachusetts, the company saw its 1992 net income eroded to $56 million.

Retrenchment and Cutbacks in the Mid-1990s

Continuing its slide, Aetna posted a net loss of $365 million in 1993, although much of that loss was attributable to charges related to downsizing. By April 1994 the company announced further layoffs, cutting staff by 4,000 jobs. Despite the layoffs, the efforts to shrink the company's unprofitable pension business, and the implementation of other cost-containment measures, industry analysts were skeptical that the sprawling insurance giant could stem continued losses.

In mid-1994 Aetna took another hit: $1.75 billion charged toward loss reserves for the purpose of paying out pollution- and asbestos-related claims against policies written for large industrial businesses as long ago as the 1950s. This action, which shadowed a similar charge against reserves made in 1992, made it the first among the nation's insurance giants to recognize corporate environmental liability.

Efforts to enter the Mexican market after the passage of NAFTA were among the company's attempts to forestall further decreases in net earnings in 1994 and 1995. Aetna also moved into the Philippines, where it was granted a license in 1995, to Latin America, where it invested $390 million in Brazil's Sul America Seguros in 1997, and to China, where it established two offices with the expectation that the country would soon be open to foreign insurance offices. Year-end 1994 saw net income rise to $467.5 million.

Against this long awaited rise in net income, the company announced that it intended to sell its property-casualty subsidiary, which had contributed mounting losses to the corporate balance sheet over the past several decades through its policies for individuals and businesses. Travelers Group agreed to a merger with the Aetna division in November, paying Aetna $4.1 billion for a 72 percent interest in the company and making the newly formed Travelers/Aetna Property Casualty Corp. one of the fifth largest carriers of such insurance in the nation. The deal closed in April 1996.

Series of Health Insurance Acquisitions in the Late 1990s

In 1996, under Compton and newly appointed Chairman of Strategy and Finance Richard L. Huber, Aetna began to shed both its corporate malaise and its tradition-bound methods of operation. Continuing to divest itself of losing real estate investments after the sale of its property and casualty division, Aetna now focused on aggressively growing its interests in managed healthcare and retirement services, a potentially risky mix according to some industry analysts, and about which Huber himself would acknowledge in the Hartford Courant that "demographics are destiny." In April 1996 the company paid $8.9 billion for HMO provider U.S. Healthcare, Inc., transforming Aetna into the nation's largest managed healthcare provider. The parent company Aetna Life & Casualty was renamed Aetna Inc., with the company realigning itself around the new name and new identity. Aetna's existing health insurance operations were merged into U.S. Healthcare, which became an Aetna subsidiary and was renamed Aetna U.S. Healthcare Inc.

A change of leadership in mid-1997 saw former banking executive Richard L. Huber named president and CEO, continuing the efforts to streamline Aetna and focus the company's manpower on what it had proven it does best. "We take care," Huber stated, "of what matters most to the vast majority of the population, their health and their wealth." In February 1998 Huber was named chairman as well, succeeding the retiring Compton.

Huber oversaw several deals in the late 1990s that further bolstered Aetna's position as a major health insurer. In July 1998 the company spent more than $1 billion to acquire New York Life Insurance Company's health insurance operations, which were known as NYLCare Health Plans. The deal added 2.5 million members to the 13.7 million people already enrolled in Aetna plans. NYLCare HMOs operated in several large metropolitan areas, including Washington, D.C., Houston, and Dallas, as well as a number of cities in the states of Illinois, Maine, New Jersey, New York, and Washington.

Continuing to shed noncore operations, Aetna sold its U.S. individual life insurance business to Lincoln National Corporation for $1 billion in cash in October 1998. Then in August 1999 Aetna completed its third major acquisition in as many years, spending about $1 billion for the money-losing healthcare business of the Prudential Insurance Company of America. The deal increased the number of Americans covered by Aetna health plans from 16 million to 22 million, and it also more than doubled Aetna's dental insurance business to 15 million members. To gain antitrust approval from the U.S. Department of Justice, Aetna had to divest its NYLCare HMO businesses in Dallas and Houston. The Texas Medical Association had opposed the deal, concerned that it would give Aetna too large a share of the market in those two cities. The American Medical Association was also against the deal, arguing that it would give Aetna too much power over physicians and be bad for consumers as well.

In fact, by this time many doctors and healthcare consumers were in open rebellion against the policies that had prevailed at Aetna since its purchase of U.S. Healthcare. It turned out that Aetna had made this acquisition at a peak point and, therefore, had paid a premium price. The company began squeezing both doctors and patients to improve profits. Physicians did not like the restrictions that Aetna contracts placed upon them, and the company began facing a rash of class-action lawsuits not only from doctors but also from patients claiming they had been denied care. Aetna's travails were compounded by the difficulty it had integrating its operations with those of U.S. Healthcare and also by the discovery that the newly acquired Prudential health unit was losing more money than anticipated. Despite steadily increasing revenues, profits were falling, dropping from $901 million in 1997 to $848.1 million in 1998 to $716.9 million in 1999.

Divesting Global Health and Global Financial Services in 2000

By February 2000 Aetna's stock had fallen to $39, having lost two-thirds of its value since August 1997. Mounting pressure from shareholders led to Huber's sudden resignation that month. William H. Donaldson, cofounder of the investment banking firm Donaldson, Lufkin & Jenrette, Inc., was named chairman and CEO. In late February managed-care firm Well-Point Health Networks Inc. and the U.S. arm of the Dutch financial services giant ING Groep N.V. jointly approached Aetna about a $10.5 billion takeover. But the company's board rebuffed this unsolicited bid and instead announced in March that the company would split, creating two separate businesses focusing on healthcare and financial services.

ING remained interested in a deal, however, and in July the two parties reached an agreement. The complicated transaction was completed in December 2000. Aetna Inc. spun off to its shareholders the Aetna U.S. Healthcare Inc. subsidiary. What remained of Aetna—the company's international and financial services units—was acquired by ING for about $7.75 billion. Aetna U.S. Healthcare was then renamed Aetna Inc. (meaning that the "new" Aetna would trace its incorporation back to that of United States Health Care Systems, Inc. in 1982). As a result, the new Aetna was focused almost solely on U.S. medical and dental insurance and related products; it did retain much smaller operations in group life, disability, and long-term-care insurance and in large-care pensions.

To turn around the troubled company, Donaldson brought John W. Rowe onboard as president and CEO in September 2000. A noted gerontologist, Rowe had most recently served as head of Mount Sinai NYU Health, a group of nonprofit New York City hospitals. Rowe was appointed chairman of Aetna as well in April 2001. Another key appointment was that of Ronald A. Williams, who was named executive vice-president and chief of health operations in March 2001. Hired away from Aetna rival WellPoint Health Networks, Williams was promoted to president of Aetna in May 2002.

One of the key steps taken by the new leadership team was to mend fences with both doctors and patients. Aetna changed many of the restrictive policies that it had implemented in an attempt to contain costs. It began providing clearer information on coverage to both doctors and patients, speeded up payments, and reduced red tape. In May 2003 the company broke ranks with its industry rivals and agreed to settle a massive class-action lawsuit that had been brought against the nation's major managed-care insurers. The suit, whose class included nearly all U.S. physicians, had listed a number of complaints, including unfair billing practices and interference with treatment recommendations. The value of the settlement was estimated at about $470 million. Aetna also introduced new health plans, such as Aetna HealthFund (launched in 2001), that gave plan members more direct control over their healthcare decisions.

To repair the company's finances, Rowe cut about 15,000 jobs and raised insurance premiums by about 16 percent per year to keep ahead of medical inflation. He also shrunk Aetna's customer base from 19 million members to 13 million by abandoning unprofitable markets, including almost half of the counties nationwide in which it offered Medicare products. Because of the drop in membership, Aetna was no longer the nation's largest managed-care insurer, but it appeared to be a stronger company. After reporting a net loss of $279.6 million in 2001, the firm was profitable the following year before the effects of a charge taken because of a change in accounting principles. The $2.97 billion charge translated into a net loss of $2.65 billion. For 2003, although revenues fell to $17.98 billion from $19.88 billion, Aetna netted $933.8 million. Wall Street responded to this turn of events by pushing the company's stock up to $75 per share by early 2004, signaling that Aetna was well on its way to recovery.

Principal Subsidiaries

Aetna Health Inc.; Aetna Health of California Inc.; Aetna Health of the Carolinas Inc.; Aetna Health of Illinois Inc.; Aetna Dental Inc.; Aetna Dental of California Inc.; Aetna Life Insurance Company; Aetna Health Insurance Company of Connecticut; Aetna Health Insurance Company of New York; Corporate Health Insurance Company; Aetna Health Administrators, LLC.

Principal Competitors

Anthem, Inc.; UnitedHealth Group Incorporated; Blue Cross and Blue Shield Association; Kaiser Foundation Health Plan, Inc.; CIGNA Corporation; Humana Inc.; PacifiCare Health Systems, Inc.; Health Net, Inc.

Aetna Inc

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