DEAL WATCH: AFTER INSURER BUYS YOUR FIRM, ARE YA STILL GLAD AETNA MET YA?: IF COMPANY SELLS LIFE LINE, JUST-BOUGHT BROKERAGE COULD BE LEFT OUT IN COLD

Miles Gordon, the usually garrulous president of Financial Network Investment Corp., is mum these days about the fate of the Torrance, Calif., brokerage.

Six months after the firm’s sale to Aetna Inc., observers are wondering what happens to Financial Network should reports that the Hartford, Conn.-based parent is peddling its life insurance business to the likes of American General Corp., Conseco Inc., the Hartford and ING Groep turn out to be true.

“Why would Aetna remain in brokerage distribution?” asks David Kaytes, a managing vice president with First Manhattan Consulting Group Inc. “Aetna is moving more and more into group health and pensions and out of the retail market.”

Aetna has been focusing on building a health maintenance organization and has been willing to sell off unrelated businesses. It sold its property and casualty unit to Travelers Group last year. And analysts and consultants say there were rumors a year ago that the company was negotiating a swap of its retirement services division – Financial Network is part of it – for a large competitor’s health care insurance business.

$50 million for distribution

If Aetna paid a reported $50 million-plus for Financial Network as a distribution network for its life insurance lines, Mr. Kaytes asks, where does the brokerage stand if Aetna sells off that business?

A spokeswoman for Financial Network said Mr. Gordon was out of town and referred calls to Aetna. The insurer was unwilling to comment.

Most observers say that Aetna is more likely, for the near future at least, to keep the retirement services unit intact. According to fourth-quarter earnings figures released last week, the division helped bolster the company’s net as its larger health care business struggled.

$380 million turnaround

Aetna reported net income of $273.9 million on revenues of $4.8 billion, compared to a net loss of $107.1 million in the 1996 period. (Full 1997 results were net income of $901.1 million on revenues of $18.5 billion.) D
espite the quarter’s improvement, the earnings merely met the lowered expectations of analysts. Results from the health care unit were

depressed by rising medical-care costs and problems related to integration of the U.S. Healthcare Inc. acquisition in 1996.

But being diversified – the retirement services unit provides 401(k) plans to about 30,000 companies – has made up for those shortcomings. Retirement services accounted for about 10% of fourth-quarter revenues yet contributed 23% of the earnings, a bigger share than the company expected, analysts say.

“Right now people are very, very happy with Aetna Retirement Services,” says Greg Crawford, an analyst with Fox-Pitt Kelton Inc. in New York.

But analysts also say that Aetna has made no bones about scrutinizing all its units and dumping dead weight or anything that does not fit into its focus. Right now, that focus happens to be on HMOs and retirement plans.

“They’re going to dissect it (Aetna retirement services) and see what fits long term,” says Kenneth Frino, financial analyst with A.M. Best Co. in Oldwick, N.J.

When Aetna bought Financial Network last June, it described the acquisition as a way to expand its presence in the 401(k) and 403(b) business. Under the deal, the brokerage’s 2,400 advisers are expected to offer financial planning to executives and employees at companies that buy Aetna’s 401(k) plans.

But First Manhattan’s Mr. Kaytes doesn’t buy the reasoning. A company that sets up a 401(k) retirement plan, he says, isn’t necessarily able to leverage that relationship to attain financial planning business.