Equity index risk may sour AmerUs deal

Jul 24, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - The largest British insurer may acquire a king-size regulatory headache as a side effect of buying a major U.S. equity index annuity provider, according to several industry analysts.

Aviva PLC, based in London, announced this month that it was purchasing Des Moines, Iowa-based AmerUs Group Co. for $2.9 billion. AmerUs ranks third in EIAs in the United States, with a 9% market share and $1.6 billion in 2005 sales.

"It's unlikely that a competitive bidder will emerge, given that equity index annuities - AmerUs' signature product - bear significant regulatory risk," said Eric Berg, an analyst with Lehman Brothers Inc. in New York.

If the Securities and Exchange Commission or Washington-based NASD decide that EIAs are securities subject to federal regulation, the increased regulatory costs could make them considerably less lucrative for insurers. EIAs currently are considered insurance products and, therefore, are regulated by the states.

But other observers say that Aviva knows what it's doing.

"Their executive team is seasoned, and they must have done extensive due diligence," said Andrew Edelsberg, assistant vice president of A.M. Best & Co. Inc. in Oldwick, N.J. "They have a small U.S. operation and are already selling equity index products in this country."

Aviva's U.S. subsidiary, Quincy, Mass.-based Aviva Life Insurance Co., offers EIAs but is not a significant player in the market.

Becoming a larger factor in the United States EIA market was a prime motivating factor for purchasing AmerUs, according to a statement issued by Aviva.

Regs won't disrupt

"We firmly believe that the indexed products are insurance, not investment products," said Tom Godlasky, chief executive of AmerUs. "We don't believe that the SEC will rule that these are registered securities."

"Having said that, as any good management team, you always have to have Plan B in mind," Mr. Godlasky added.

"About 50% of our premiums are already sold by registered producers," he said. It would take about three to four months to get the other producers registered, probably cost about $3 million to $4 million to make the filings with the SEC and [require] other necessary steps to comply with federal regulations, Mr. Godlasky added.

"Regulators have been considering [EIAs] for a long time, and it's not clear whether any significant regulatory change will occur in the near term," said Sue Winston, a spokeswoman for Aviva.

"We don't believe that if a requirement to register was introduced - with a transition period - it would cause any major disruption to sales, given the existing high level of training and experience among AmerUs agents," Ms. Winston added.

Analysts are wary

Some analysts think that increased federal scrutiny of EIAs will dampen the companies' rosy post-acquisition outlook.

"It's possible that there was no U.S. buyer because a domestic insurer would have been more familiar with the intricacies of the equity index business," said Rob Haines, an insurance analyst with CreditSights in New York. "But if this deal falls apart, I don't think that it will be because of regulatory issues; it will be because another company steps in with a better offer."

U.S. insurers that aren't in the EIA market by now probably are wary of it, noted Mikir Shah, an analyst with New York-based Fox-Pitt Kelton Inc. "If this business is attractive, you would have expected a U.S. player to make a bid," he said.

"Players who have excess capital already have their own similar products, and those that don't have shown an aversion to products subject to regulatory risk," said Lehman Brothers' Mr. Berg.

"For the long term, this [regulatory controversy] is just a little bit of a bump in the road," Mr. Godlasky said. The company will be prepared to move forward if the SEC rules that EIAs are to be regulated as securities, he added.

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