Aetna's Heavy Ax

Ronald E. Compton is a man of his word. At Aetna Life & Casualty Co.'s annual meeting last April, he promised that the insurer would be profitable in each of its lines. Otherwise, he said, "we won't be in that business." Executives of marginal units didn't have to strain to get the message: Turn things around, or face the music.

It was no idle threat. On Jan. 28, CEO Compton said Aetna would stop selling guaranteed investment contracts (GICs) and single-premium annuities to pension plans. He also announced plans to lay off 10% of Aetna's 42,000 workers. Want more? Hang on. "I can positively guarantee you," Compton says, "this is not the end of changes."

The resulting charges likely will produce a 1993 net loss of at least $350 million. But these are needed changes. Aetna's profits have declined steadily since 1987, with its stock following suit. A big corporate bureaucracy kept overhead costs high, and a tradition of offering a big, diversified product line made it hard to let go of unprofitable units.

Until now. Price competition from specialty insurers, such as GEICO Corp. and Progressive Corp., has forced even the biggest multiline companies to pare back their offerings. ITT Hartford Insurance Group sold its health business last year, and CIGNA Corp. dropped auto policies. Says Gerald A. Isom, president of CIGNA's property and casualty line: "An insurer specializing in certain lines can make a profit much easier."

Finally, Aetna is specializing, too--with good reason. The GIC and single-premium annuity businesses, which guarantee returns to buyers, have lost $125 million since 1992. Aetna has also shuttered unprofitable auto insurance operations in 28 states and sold its individual health business and reinsurance operations. "If we can't make money," says Compton, "we'll get out."

How to make money? Cut costs. The latest restructuring should save Aetna $300 million a year, and more cuts are likely in the troubled property and casualty business. But its expenses remain among the industry's highest: Overhead in property and casualty is 32% of premium revenues, compared with an industry average of 27%.

STREET SMARTS. A philosophy major at Northwestern University who began his 40-year career at Aetna as an underwriter, Compton has combated high costs by emphasizing technology in reengineering the company. His goal: to push Aetna's return on equity, now at 7%, to the industry average of 12%. Wall Street likes what he's done so far: In the two days after the announcement, Aetna's stock rose 9%, to 63. And Sanford C. Bernstein & Co. analyst Weston Hicks raised his earnings estimates for 1994 and 1995 by 12% and 15%, respectively.

Compton's next step: Building profitable businesses. Getting out of GICs and single-premium annuities will free about $1 billion for Aetna to expand its successful variable-annuity business, international operations, and managed-care lines, says Hicks. Aetna's variable-annuity sales grew 53% during the first half of 1993, according to industry newsletter The VARDS Report.

With Aetna's rivals moving just as fast, though, Compton has high hurdles. "Our shareholder return is not what it should have been," he admits. At last year's annual meeting, though, he promised shareholders to place Aetna in the top half of the Dow Jones Insurance Industry Index by 1997. He still has to make good on that promise.

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