After Aviva CEO Andrew Moss told an investors conference last week that the British insurance giant would investigate the possibility of selling off its North American operations, most of the speculation turned to how this would affect Aviva's profitability and positioning in the marketplace. But just as critical a question is what would happen to those spun-off operations here in the U.S. Would Aviva be able to quickly find a buyer, and if so, who would it be?
Whoever does snap up Aviva's U.S. operations will be gaining a sizable piece of business. Although Aviva doesn't break out American sales specifically, its North American unit reported more than $300 million in profits. Aviva USA, based in West Des Moines, Iowa, has been valued by Eamonn Flanagan, an analyst with Shore Capital in Chester, England, at around $1 billion. Just two years ago, Aviva opened a new 360,000-square-foot corporate headquarters building in Iowa, where it employs 1,300 people.
But the business certainly hasn't been performing up to Aviva's standards. Last week, the India-based financial newspaper the Business Standard reported that in November 2010 Aviva set a series of targets for its businesses to hit, including a 12 percent return on equity. One of the businesses that fell far short was that in the U.S., where the ROE in 2011 was only 3.7 percent.
And it's not a great time to be selling. UBS has estimated that American-based life-insurance businesses are now trading at only 0.9 times their book value. But one primary reason Aviva is looking to sell now is because of Solvency II, the new EU insurance regulations that will come into effect in 2014. European insurers will be required to hold much more in the way of reserves under Solvency II, which is especially difficult on indexed annuities, Aviva's flagship product here in the U.S. Aviva paid $2 billion to acquire AmerUs of Des Moines back in 2006 when it was seeking to strengthen its foothold in the American market, so the current value of its American holdings is only around half that.
The good news is that Aviva's American business is probably available at a bargain price right now. With interest rates so low, indexed annuities have been taking a beating in the marketplace, but rates are likely to turn back up at some point, greatly enhancing the value of the business. "A large variable annuity company might be interested," says Judith Alexander, director of sales and marketing at the annuity-research firm Beacon Research. "It might enable them to offer their products through different channels."
Who's the likely buyer? There are several possibilities:
Newport Beach, Calif.-based Pacific Life recently entered the indexed-annuities space, which is the specialty of Aviva USA. And it's been on a bit of a buying binge lately. It purchased Manulife's Life Retrocession business last July and U.S. Pension Advisory Group last August. The question is whether Pacific Life still has the resources available for another major acquisition.
