Aetna, Inc.

151 Farmington Avenue
Hartford, Connecticut 06156
U.S.A.
(203) 273-0123
Fax: (203) 275-2677
Web site: http://www.aetna.com

Public Company
Incorporated: 1853 as Aetna Life Insurance Company
Employees: 38,600
Total Assets: $87.10 billion (1996)
Stock Exchanges: New York Pacific Basel Geneva Zürich
SICs: 6311 Life Insurance; 6321 Accident and Health Insurance

Aetna, Inc. markets a diverse array of insurance lines and financial services to individuals, public and private institutions, and corporations. Aetna is investor-owned (owned by its stockholders) rather than a mutual company (owned by its policy-holders.) It is the largest investor-owned insurance and financial services company in the nation and, based on assets, is classed among the 15 largest U.S. corporations.

Prominent New England Lawyer Establishes Company Direction

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 Fire Insurance Company and profited from its association with Aetna Fire’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 partly 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 policyholders.

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 due to 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.

Policyholders Resist 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 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 Twentieth Century: Diversification and Innovation Reap Rewards

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 twenty-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.

New President Streamlines Procedures: 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 had also acquired a third affiliate, the Standard Fire Insurance Company, which further strengthened its position.

Company Perspectives:

Today, Aetna is a whole new enterprise. We have executed a strategy that we believe will increase shareholder value and, equally important, enhance our ability to deliver top-quality products and services that make a difference in the lives of the millions of customers around the world who have placed their faith in us. We aj Aetna have created a new company for a new time. Now, our goal is to realize the full potential of this great new venture.

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 had also 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 which defaulted during the Depression, Brainard’s careful business practices kept the losses to a minimum.

Renewed Expansion During 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 was also involved in insuring the production of the atom bomb under the Manhattan Project, a uniquely challenging actuarial task since 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.

With Beers’ 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.

Company Goes International in 1960s

In 1960 Aetna entered the international market with the purchase of Excelsior Life Insurance Company of Toronto. To facilitate flexible management of these expanding operations and allow diversification into non-insurance fields, Aetna Life and 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, partly due to nationwide decreases in losses and increases in premiums and partly due to Aetna’s move to control costs and concentrate on the most profitable lines of insurance. However, rapid diversification into non-insurance fields later in the same decade undermined earlier gains. Particularly ill-fated acquisitions were Geosource Inc., an oil-field-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 was also reorganized.

In 1981 the company reorganized its operations into five insurance divisions. The employees benefits division offered group insurance, health-care 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 industry-wide 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 chief executive officer. 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 five 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.

Changing Economy Brings New Challenges in the 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 healthcare insurance. By 1990 Aetna Life and Casualty had spent over $400 million to establish its own H.M.O., 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 due to 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 for the future 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 for $1.4 billion, raising much-needed cash. In an effort to retain customers lured away from insurance by mutual fund offerings, Aetna Life and Casualty began offering five mutual funds on the retail marketplace in September of 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 lay-offs, cutting staff by 4,000 jobs. Despite the lay-offs, 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 efforts 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.

In 1995, 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 H.M.O. provider U.S. Healthcare, transforming Aetna into the nation’s largest managed healthcare provider. A new holding company, Aetna, Inc., was formed to oversee the expanded operations, with the company realigning itself around the new name and new identity. Despite the high costs associated with the creation of Aetna U.S. Healthcare, net income for 1995 was posted at $205 million.

Changes Continue into Next Century

Aetna’s corporate direction continued to evolve as the insurance giant entered the final years of the 20th century. A change of leadership in mid-1997 saw former banking executive Richard L. Huber moved into the chairman spot, continuing the efforts to streamline Aetna and focus the company’s manpower on what it had proven it does best. “We take care of what matters most to the vast majority of the population,” Huber stated, “their health and their wealth.”

During its long history, Aetna has worked to balance innovations with the continued need to control the expansions that such innovation spawns, through both prudent corporate management and rapid financial retrenchment in periods of decline. In its efforts to contain the company’s expertise within a relatively narrow field of industry involvement—growing its international markets for life insurance and financial services, while focusing on domestic retirement services and H.M.O.s at home—the insurance giant is poised to enter the next century in a competitive mode. With its new focus reflecting the nation’s ageing population, demographics, rather than acts of god, have indeed become Aetna’s destiny.