Aviva USA good fit for Athene

Already a force in the indexed annuity business, Athene Holding Ltd. was a logical choice to buy Aviva USA, say industry observers. On Friday, Athene announced its plan to buy Aviva USA from Aviva PLC for $1.8 billion, once again indicating the growing presence of private equity in the fixed and indexed annuity industry.

"I think everyone was expecting one of the private equity companies to buy Aviva USA, so it's not a surprise," said Judith Alexander, director of sales and marketing for Beacon Research, which tracks the sale of fixed and indexed annuities.

Based on how Athene has absorbed its previously acquired companies, Alexander said it's unlikely it will run Aviva USA as a closed block of business. "They've invested, developed and introduced new products and that's what the industry wants to see," she said.

Further, Alexander noted that Bermuda-based Athene's top management has experience in the insurance industry. Its founder, chairman and CEO, James Belardi, held executive positions at SunAmerica Life Insurance Co. and AIG Retirement Services, Inc.

"A lot of people have expressed some concern that the private equity people don't really understand the annuity industry," she said. "But Athene's founder and executives know the industry very well. They were in it for years. That bodes well, too."

In a company statement, Athene said its latest acquisition will be renamed Athene USA and will remain headquartered in Des Moines, Iowa. It also stated it is "committed to retaining a substantial employee base in Des Moines." Less certain is the fate of Aviva USA's life business. In the same statement, Athene said it "is evaluating strategic options with respect to Aviva USA's life insurance operations." Once closed sometime in 2013, the merger will vault Athene to the second spot among U.S. fixed indexed annuity issuers, said the company statement.

Matt Golab, RIA and a licensed insurance agent at Aaron Matthews Financial Resources in Elk Grove, Calif., gave the union of Aviva USA and Athene a favorable review. "Many in the industry have had their eye on Athene over the last year as the company strategically built its presence in the indexed annuity space as well as the hybrid income annuity space," he stated via email.

For advisors who focus on retirement income planning and conservative asset management, the combination of the two companies is a positive, Golab added. "The strength of Aviva's U.S.-based indexed annuity business plus the innovation Athene has brought in recent years will continue to place them at the top of the indexed annuity business."

Private equity play

Athene is not the only private equity player that has been active in the indexed annuity space in recent months. Earlier this month, Guggenheim Partners, one of the rumored buyers of Aviva USA, snapped up the U.S. annuity line of Sun Life Financial, Inc. for $1.35 billion. In August, two Guggenheim affiliates, Security Benefit Life Insurance Co. and Equitrust Life Insurance Co., agreed to purchase the U.S. fixed annuity business of another Canadian-based insurer, Industrial Alliance Insurance and Financial Services, Inc., for $800 million.

Also in the summer, Athene agreed to buy Presidential Life Corp. in a $415-million all-cash deal. One of the products Presidential sells is fixed annuities.

In its announcement of the Aviva USA deal, Athene said it has received a $621-million capital infusion and expects to hold more than $3.5 billion of combined statutory capital within its insurance company subsidiaries following the Aviva transaction.

Indexed annuity sales have risen even as other types of annuities, like fixed-rate products, have seen their sales slump. Yet Beacon's Alexander pointed out that sales of indexed annuities would have fallen if not for private equity companies like Athene, Equitrust and Security Benefit Life.

According to Alexander, total indexed annuity sales in the third quarter were ahead by only an estimated $44.2 million in comparison to Q3 2011. If the growth of the private equity-owned companiesAthene, Equitrust, F&G and Security Benefit Lifewas taken out, the actual indexed annuity sales results would have declined.

"Most people in the industry have been glad to see as so many annuity issuers pull back, that private equity companies are stepping up to the plate," Alexander said. "Indexed annuities have certainly done better than fixed-rate annuities, but maybe they haven't done as well as the overall numbers would suggest."

In yet another indication of how private equity has moved into the fixed annuity space, year-to-date, private equity-owned companies' total market share rose from 2.8 percent in 2011 to 9 percent in 2012, according to Beacon Research. Moreover, their share of indexed annuity sales grew from 5 percent in 2011 to 15.4 percent in the same period.

Unlike stock companies, private equity outfits, like the mutuals, have an advantage in that they are not beholden to quarterly profit targets, Alexander said. Moreover, they consider themselves investment specialists. "Several have gone on record as saying, 'We manage a lot more money than any of the insurance companies, and we have the expertise and the manpower.' So they feel they can get better returns for that reason," Alexander said. "We'll see. They very well may be right."

Although sales may be in a downswing, it's not for lack of demand, Alexander said. To maintain profitability, carriers have cut back on cap rates (in the case of indexed annuities) and credited rates on fixed annuities, making the products less attractive to consumers. "If you want to increase your sales, and are willing to offer somewhat attractive terms, you will definitely sell plenty of annuities," Alexander said.

View from the rating agencies

The rating agencies, meanwhile, are taking a more measured view. Standard & Poor's affirmed its A- rating on Aviva USA, but said the rating remains on CreditWatch Developing. The continuation of that is due to "the level of uncertainty regarding how Aviva USA's credit profile could change as it is sold and transitioned to a new owner."

Fitch Ratings placed the BBB+ rating of Athene Annuity & Life Assurance Co. on Rating Watch Negative. According to Fitch, the Aviva USA deal is expected to increase Athene's aggregate liabilities to more than $60 billion and deliver greater economies of scale.

Although Fitch noted that Apollo Global Management has agreed to provide up to $100 million to Athene, the insurer will need additional capital to close the Aviva deal. Athene also faces integration risk at the same time it is closing on the Presidential Life merger, noted Fitch analysts Tana M. Higman and Bradley S. Ellis.

See also:

Avvia PLC appoints new CEO

EIA market likely to survive Aviva exit

Aviva Plc sells stake in Dutch insurer, plots new course