Britain's biggest insurer, Aviva Plc, is in talks to buy U.S. life insurer AmerUs Group Co, valued at about $2.3 billion, in a deal that would boost Aviva's undersized presence in the booming U.S. market.
Aviva, whose bid for UK rival Prudential was rebuffed in March, has long said it wants to expand in the United States, the world's biggest long-term savings market.
Des Moines, Iowa-based AmerUs, focused on lucrative indexed annuities, said in a statement on Friday there was no assurance the talks would end in a transaction.
But news of a possible deal - which Aviva expects to fund with a combination of internal resources, debt and a share issue - pushed the UK insurer's shares down by more than 3 percent.
They walked away from Prudential already, so there's a little bit of pressure on them to complete this deal. It won't reflect well on the company if they continue to walk away, analyst Mikir Shah at Fox-Pitt, Kelton said.
It does mean they will get some U.S. exposure - they won't get the right product range, the right scale of distribution or scale of business, but it's a first step. As far as I'm concerned it highlights their acquisition appetite.
Aviva had denied press speculation in January that it was poised to buy AmerUs, preferring instead to pursue a merger with Prudential, Britain's second largest insurer, largely for its fast-growing Asia and U.S. operations.
Part of the attraction of Prudential was its Jackson National Life unit, one of the largest U.S. life insurance companies with a strong position in the lucrative variable annuity market.
Aviva gave no price for the possible AmerUs deal, but at a 15 percent premium to Thursday's closing price, it could be worth around 1.5 billion pounds ($2.8 billion).
That would value AmerUs at 12.8 times 2007 earnings forecasts, according to analysts at Fox-Pitt, Kelton, above U.S. majors, such as MetLife on about 9.7 times.
(At that price) it would be 4 percent dilutive on Aviva's embedded value and two percent accretive on earnings per share, assuming it is financed in equal proportions cash, internal resources and equity placing, Shah said. That indicates they'd be paying a fairly full price.
The United States currently represents 4 percent of Aviva's new life and pensions sales outside Britain. The unit, focused on niche areas such as fixed annuities for teachers and structured settlements, had sales of 527 million pounds in 2005.
(AmerUs) is not transformational like the Prudential deal (would have been), analyst Bruno Paulson at Sanford Bernstein said. It turns them from negligible into tiny in the U.S.
AmerUs has assets worth $24.7 billion as of the end of March and is a market leader in indexed annuities, retirement savings products in which returns are linked to an index, typically equities - a sector that has expanded fivefold in the past five years to some $25 billion in 2005.
The Financial Times said in its report a deal could be announced as early as next week.
Aviva gave no timing, but said any equity placing would be accompanied by an update on Aviva's current trading.
Its shares were down 2.9 percent at 0806 GMT at 730-1/2 pence versus a 0.9 percent drop in the DJ Stoxx European insurance index and valuing the firm at about 18 billion pounds.
Aviva's takeover talks with AmerUs are the latest in a series of M&A discussions within the industry in recent weeks, as firms in the sector start to put some of their growing excess cash to work to strengthen weak spots in their businesses.
French reinsurer Scor agreed to buy German rival Revios earlier this week; Generali has bid 3.85 billion euros ($4.9 billion) for smaller Italian insurer Toro Assicurazioni, while AXA has agreed to buy Swiss insurer Winterthur for $10.9 billion.
(Additional reporting by Mark Potter)