By Linda Koco
Aviva USA is reportedly close to being sold, and that news is setting off a new round of speculation about what impact such a sale might have in the U.S. fixed annuity business.
Igniting the speculation is news that Aviva plc, the company's British parent, is preparing to sell its U.S. unit after receiving unsolicited approaches from potential buyers. The news broke Sunday in The Telegraph, a British newspaper and website.
The news story does not cite names of potential buyers, but it does mention that the suitors are financial and private equity firms.
The development is not a total surprise. After all, in early May, when Andrew Moss announced he was resigning as chief executive of Aviva and the company announced it would reorganize, buzz started circulating that Aviva USA might be sold as part of the reorg. That buzz was never confirmed by the carrier and things quieted down within weeks.
Why the Stir
At this writing, Aviva has not confirmed or denied the newest report of a pending sale. But that has just fueled speculation among advisors and distributors, such as: Who might the new buyer be? What would happen to products the company currently offers for sale? How would service of existing policies be handled? What about the impact on commission agreements and payments and on existing contracts? Should I start placing my new cases with another carrier just to be on the safe side?
The heft of the company in the U.S. fixed annuity market plays a role in all this. In the first quarter, Aviva USA ranked in second place in the U.S. individual fixed annuity business, according to estimates from LIMRA and Beacon Research. It also held a 14.3 percent market share in the fixed indexed annuity marketplace, according to a first quarter report from AnnuitySpecs.com.
In terms of dollars, the carrier's first quarter U.S. fixed annuity sales came to nearly $1.18 billion, LIMRA and Beacon both report. This represents 6.95 percent of total estimated fixed annuity sales for the quarter, according to Beacon.
The lion's share of these fixed sales came from Aviva fixed indexed annuities (nearly $1.16 billion in the first quarter, according to AnnuitySpecs.com).
Disruption and unsettled feelings always occur when a long-term player leave the market, says Judith Alexander, director of sales and marketing at Beacon, in reflecting on advisor concern about the possible sale.
Where Aviva USA is concerned, the company has been a U.S. annuity player since it purchased AmerUs Life Insurance Company in 2006. AmerUs was a growing fixed annuity carrier at the time. That means the company, operating as Aviva USA, has been a fixture in the indexed annuity market for nearly half the time that indexed annuities have been around. (Carriers first introduced indexed annuities in the mid-1990s, and sales did not gain steam until the 2000s.)
The Aviva website says the company has 954,019 individual U.S. customers, and 27,601 individual U.S. agents. Not all of that business is due to annuities, of course. The company sells life insurance, too. But the numbers shed some light on why advisors are concerned about a possible sale — i.e., the company has a definite presence.
Alexander suggests that whether a sale of Aviva USA will hurt or help advisors depends on who buys the company.
"So far, the annuity companies that have been sold to new market entrants tend to result in a net positive for the industry," she points out. "And they came out with very competitive products at a time when other carriers were pulling back."
A Beacon analysis of the largest year-over-year fixed annuity gainers in first quarter 2012 compared to first quarter 2011 found that two new market entrants were the top two on the top 10 list. These were F&G (previously owned by Old Mutual Financial Network, now owned by Harbinger Capital Partners) and Security Benefit Life (now owned by Guggenheim, which also purchased EquiTrust).
Ironically, Alexander adds, Aviva reported the third-largest increase relative to first quarter 2011. "But some perspective is in order here," she says. "Aviva's first quarter 2011 sales were unusually low (down almost 35 percent from fourth quarter 2010 and 25.6 percent from first quarter 2010). In addition, Aviva's first quarter 2012 sales were down 4.5 percent, quarter-to-quarter."
When private capital company buys an annuity carrier, as has been the case with a number of deals, that can be a positive for the market, Alexander says. "That's partly because private capital firms don't have to worry about quarterly earnings report the way stock companies do, so they can focus more on long-term decisions and planning."
Private capital groups may have competitive advantage in their ability to manage money. "If they make excellent investments, they will be able to credit higher rates and still make a nice profit," she explains, adding that such an outcome would be good for both buyers and advisors.
Little to no disruption
Jack Marrion, president of Advantage Compendium, predicts there will be little to no disruption in overall market for traditional fixed annuities or for fixed indexed annuities should Aviva USA be sold.
"Other carriers will pick up any slack resulting from such a sale," he explains.
To illustrate, he points to the 2003 sale of Keyport Life to Sun Life of Canada. At the time, Keyport ranked in the top 10 of indexed annuity companies, but other carriers stepped in to the market, or stepped up their sales, and the indexed annuity market continued to set new quarterly records. (So far, the record holder is third quarter 2010, when indexed annuity sales reached nearly $8.8 billion, according to AnnuitySpecs.com.)
Like Alexander, Marrion believes that much depends on who buys the company and for what purpose.
For example, if a company buys a carrier and runs it, bringing in new management that results in greater profits, that would have a different outcome for the marketplace than if the buyer buys it, sells off the existing book of business, and keeps the distribution network for its own products.
In the annuity business today, Marrion doesn't foresee a carrier buying a fixed annuity company primarily for the seller's existing book of business. Most of those annuities will likely have higher minimum guarantee than the buyer could support in today's prolonged low interest-rate environment, he explains.
That would be so, unless the buyer bought the company on the cheap, he cautions. In that case, the buyer probably wouldn't care about incorporating an existing book in today's interest environment. The buyer could just use profitable operations to even things out until the interest rate environment improves and the older book becomes more profitable.
But Marrion says a more likely scenario is that the buyer would be a company that wants Aviva's distribution network. "It could be that the buyer would spin off the bulk of the company and keep the distribution. But if it does that, it will need to create new products. Aviva is creative in product design, so it could be the buyer might want to keep the Aviva product people, too."
It also could be that such a buyer would keep things as they are and then seek to cross-train the distribution network to do other things, too -- sell life insurance, do asset gathering, etc., Marrion adds.
Swallow it Whole?
Some industry people are wondering if the buyer might just swallow Aviva USA whole — in other words, subsume the annuity operation into itself. That could happen. After all, that's what Aviva did when it purchased AmerUs. That's what ING did when it bought Keyport.
But it doesn't always happen. In 1970, ITT Corporation bought Hartford Insurance in what was then the largest corporate takeover to date. It became ITT-Hartford Group, Inc. Then, in 1995, it once again became independent and two years later, assumed its current name, The Hartford Financial Service Group. All along the way, the carrier made lots of industry news, and industry professionals continued to refer to it just as "The Hartford."
Today, the company has begun scaling back on its annuity business, but it's still referred to by insiders as Hartford. It still has its identity. Whether that happens with Aviva USA remains to be seen.
Here's a final point to munch on: The Telegraph article about the potential sale of Aviva USA mentions that the understanding is that an investment bank has not yet been formally appointed to handle the sale, but that "it is thought" that executives will choose a bank, probably Goldman Sachs.
Goldman has a lot of expertise with bonds and bond sales. That could be a nice fit for working on an annuity company sale. What's more, Goldman owns Commonwealth Annuity and Life Insurance Company, which has been writing variable annuities but which just rolled out its first fixed annuity this spring — a multi-year guaranteed annuity. That also could be a nice fit.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at email@example.com.
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01 Aug, 2012
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