Analysts say it's unlikely Aviva can sell its U.S. division
April 24, 2012 by Adam Belz
11:44 PM, Apr. 23, 2012 |
Written by
Aviva may want to sell its U.S. business, but the real question may be whether anyone wants to buy it.
Analysts say it’s unlikely the British insurer Aviva PLC can sell its U.S. division — headquartered at a $140 million campus in West Des Moines where roughly 1,300 people work — for anywhere near the price it would like.
Rumors have swirled through the financial press since Aviva’s global CEO, Andrew Moss, told investors privately two weeks ago he would consider offers on the U.S. business. One British newspaper, the Times of London, has gone so far as to put a date on an announcement of the sale: May 24.
But analysts say the reasons Aviva may want to sell are the same reasons it would be difficult to do so. Aviva paid about $3.2 billion in today’s dollars for AmerUs in 2006, but the business has lost value, the U.S. indexed annuities market as a whole was flat in 2011, and an impending set of European insurance regulations casts doubt on the future of trans-Atlantic insurance companies.
“The speculation is that the group may only get 1 billion pounds ($1.6 billion) if it was sold today,” Eamonn Flanagan, an analyst with Shore Capital in Chester, England, told the Register in an email. “Although a ($1.6 billion) exit price would ‘hurt’ Aviva, I think they would probably accept it, as a sale would free up a considerable amount of capital for the group, which it could utilize elsewhere in the business.”
Barrie Cornes, an analyst at Panmure Gordon, an investment bank in England, takes a different view. He believes Aviva has wanted to sell its U.S. business for two years, but he doesn’t think Aviva is desperate enough to sell for the price the company could fetch today.
“It’s possible, but I think it would be disappointing if they did and only got the rumored ($1.6 billion),” he wrote in an email to the Register.
Officials at Aviva have been silent on the possibility of the sale, and the past two weeks have been busy ones for the company. Three top executives, including Richard Hoskins, CEO of the company’s North American operations, stepped down last week. Aviva USA CEO Chris Littlefield will now report directly to Moss instead of Hoskins.
A spokesman for Aviva USA said the change will have no impact in West Des Moines, and Littlefield wrote a letter to agents addressing the sale rumors as soon as they became public.
“Obviously things can change and CEOs have an obligation to consider offers that make sense for the company’s shareholders,” Littlefield wrote. “However, if there is ever a decision to sell the U.S. business, you will hear it from us directly rather than just read about it in the paper.”
Aviva traffics mainly in indexed annuities — a safe, low-return investment product that’s popular with risk-averse retirees and baby boomers. Generally customers turn over money to Aviva — often a portion of their retirement savings — and Aviva gives it back to them in a stream of payments over the rest of their lives.
With indexed annuities, Aviva guarantees the customer won’t lose money on the investment. The rate of return is tied to a market index like the S&P, but won’t rise above a certain percentage, and won’t go negative. That makes the product different from variable annuities, which function like mutual funds, offering higher potential returns but also the possibility of a loss.
According to Annuity-Specs.com, an industry data firm in Pleasant Hill, Aviva was the No. 2 seller of indexed annuities in the U.S. in 2011, with $4.5 billion in sales. But that was a 13.5 percent decline from 2010. Meanwhile, competitor American Equity Investment Life, also in West Des Moines, saw sales rise by 6.4 percent, to $4.4 billion, according to AnnuitySpecs.
Aviva cited low interest rates for its sales decline. Low interest rates make it harder to earn money selling annuities, since profit comes from the difference between the interest paid to the customer and the interest earned by the insurer through investing the money.
“In light of the low interest rate environment, we have been intentionally balancing volume with profitability on our annuity business,” Kevin Waetke, Aviva USA spokesman, said in a statement. “We still have a large and significant annuities business, our total book of annuities business continues to grow and we are committed to continuing to strengthen our leading annuity franchise.”
Indexed annuities command about 14 percent of the annuity market, but they’ve gained market share since 2007. They’re safe, so investors turn to them when markets are down. When the stock market rises, variable annuities become more popular.
Cornes said Aviva has pulled back from selling indexed annuities because of the capital requirements. Because the risk of losses is borne by the insurer, regulators require insurers to carry high levels of capital as a cushion against losses. Not so for variable annuities, which place the risk of a market crash on the shoulders of customers unless they buy expensive riders to protect themselves.
This makes the prospect of a new, more rigorous set of capital requirements in Europe, known as Solvency II, even more troublesome for Aviva than it is for firms that sell mostly variable annuities –— say Prudential, and its subsidiary Jackson Life.
Solvency II could go into effect as early as Jan. 1, 2013. The details are not settled, but the uncertainty has forced European companies to consider unloading American subsidiaries. Prudential, also based in England, has threatened to move its headquarters to the U.S. or Asia if the firm doesn’t like how the rules shake out.
Cornes said selling the U.S. business makes sense for Aviva. Aviva plc’s European business could use the capital boost, the move would erase some uncertainty around Solvency II, and Aviva should focus on its European business anyway, he said. But he doesn’t think Aviva can get the price it wants.
“Whilst there may be a strong rationale for such a sale including the consequent capital boost, Solvency II concerns, and the European strategic focus, we do not think that current prices for U.S. life businesses make a disposal sensible at the current time,” Cornes wrote.
Until Solvency II is resolved, the pool of potential buyers for Aviva’s U.S. business would probably be limited to large American insurers, such as MetLife or New York Life, Flanagan said.
“A UK or European buyer would face the same problems that Aviva has — namely capital intensity and a changing regulatory regime,” Flanagan said. “A U.S. company may find it easier to launch its own product range.”