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Aetna Inc. (NYSE: AET)
151 Farmington Avenue Hartford 06516
(860-273-0123, www.aetna.com)
Chief Executive Officer:
Richard L. Huber
Revenue (1st quarter 1998):
$4.63 billion
Net income (1st quarter 1998):
$153.6 million
Market capitalization: $11.7 billion
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Business New Haven
6/1/1998
By: BNH
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Aetna's sale of its life insurance business to Lincoln National for $1 billion in cash was an ideal match of buyer and seller.
Lincoln National had been on the prowl for additional acquisitions since its purchase last year of Cigna's individual life and annuity business for $1.4 billion. Likewise, Aetna had been shopping its life insurance arm around for several months, and widely reported rumors before the official announcement had suggested that a deal was close.
What Lincoln gains from the transaction is easy to see. For its $1 billion, it gets one of America's top 15 life insurers with a portfolio of policies totaling $50 billion. Perhaps more importantly, Lincoln receives a distribution channel particularly directed at the affluent market. These high-end consumers will be an important source of diversification for Lincoln's business, now 80-percent concentrated in annuities.
The question for Connecticut's Aetna employees and shareholders is, what impact the sale will have on the company's efforts to recover from a collapse in share prices in mid-1997 due to problems integrating the Aetna subsidiary US Healthcare. The sale should not have an immense impact on Aetna's bottom line.
The company is not surrendering all of its life insurance, since it will retain its annuity business through financial services, as well as international life. Moreover, individual life was not a major part of Aetna's offerings. According to Aetna CEO Richard Huber, “Our individual life customer base represented less than five percent of Aetna's total life customers,” with group life offered through US Healthcare serving many more customers.
And the sell-off of Aetna's life insurance business has little to do with the troubles that buffeted the company's share price in 1997. Investor worries centered on rising costs at US Healthcare, an issue entirely separate from this transaction.
Aetna has not yet made clear what it intends to do with its $1 billion windfall, but suggests that its options include internal investment, strategic acquisition, or share-buybacks. Investors would certainly appreciate the last choice, since Aetna's shares are cheap by any measure. Aetna stock trades at just over book value, with revenues per share 50 percent greater than share price and a price-earnings ratio of only 16.
While Aetna's share price has recovered somewhat from last year's troubles, a buyback program would be a boon to shareholders who saw Aetna's stock fall sharply over the last half of 1997. Huber has promised to “aggressively repurchase” the shares included in Aetna's last buyback authorization.
Subject to state and federal regulatory approval, the sale will close in the fall of 1998. By that time it should be clearer whether any Aetna employees will lose their jobs as a result of the transaction. According to Huber, “Both companies plan to work together to make this a very smooth transition for our customers, agents and employees” by relying as much as possible on retirement and redeployments.
Lincoln National plans to relocate its Bloomfield facilities and its 600 employees there to downtown Hartford. On the other hand, since Lincoln has now purchased the life insurance businesses of both Cigna and Aetna, it will certainly look for cost savings by consolidating overlapping operations. Managing that without cutting jobs will be a tough assignment.
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