In a move to retreat from the U.S. market, Aviva is selling its U.S. life and annuities business to Athene Holding, an insurance outfit that is backed by private equity firm Apollo. The deal, valued at $1.8 billion, represents the company’s continued effort to narrow its focus on fewer and more profitable businesses and markets. Aviva indicated that the capital relief from the sale will put its solvency ratio within the target range of 160%-175%.
Aviva is one of the largest insurers in Europe, but it is also one of the most poorly capitalized in the industry. Its U.S. annuities business, while marginally profitable, has been a trouble spot as interest rates remain low. We believe that the U.S. annuities business would hurt the group’s solvency position under the new Solvency II regime because of regulators’ concerns about interest rate and market risks related to the business.
The sale is not a big surprise to analysts, as Aviva needs to trim its balance sheet and focus on improving profitability. It’s also not surprising that the business is being sold to an insurance holding company backed by a private equity firm. Earlier this week, Sun Life SLF agreed to sell its U.S. annuity business to Guggenheim Partners for $1.35 billion. In bidding for annuity assets, private equity firms are looking to source a stable revenue stream and betting that they can earn a better yield than the insurance companies, which are often constrained by regulators to invest in safer but lower-yielding securities.
The U.S. life and annuities business generated operating profit of GBP 223 million in 2011 and was a material part of the company’s North America operations, so analysts expect some changes to EPS estimates.
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