Aviva's AmerUs Buy Isn't Flying Yet

This column was originally published on RealMoney on July 12 at 1:45 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

"The time has come," the Walrus said,
"To talk of many things:
Of shoes -- and ships -- and sealing-wax --
Of cabbages -- and kings --
And why the sea is boiling hot --
And whether pigs have wings."

-- from Lewis Carroll's The Walrus and the Carpenter

My last post on AmerUs Group expressed doubt with respect to the interest of Aviva purchasing it. Now it looks like a deal might fly after all. My central point from that post still stands, though: The deal is rumored to have Aviva buying AmerUs in the low $70s. If you like AmerUs in the $70s (which implies a 13 multiple on 2007 earnings and 1.8 to 1.9 times book value), you should love the companies I've listed in the table below even more.

I do not endorse purchases in all of the companies. I'm long only two of the names, Assurant(AIZ Quote) and MetLife(MET Quote). The table is only to draw attention to some companies that I deem cheaper than AmerUs, with better prospects.

Granted, one of the names on the list -- MetLife -- is probably too big to be taken over. The rest are smaller than Prudential(PRU Quote), which Aviva made a run at in March. Some others, such as National Western(NWLIA Quote) and Nationwide(NFS Quote), can't be taken over because of control investors. But the rest could be tastier morsels or meals for a company the size of Aviva.

In insurance acquisitions, additional value can often be created through cost savings, revenue synergies and better management. To me, none of these apply to a purchase of AmerUs by Aviva.

Aviva has limited operations here in the U.S., so cost savings should be small at best. Products and knowledge in insurance are often country-specific, so I don't see a lot of revenue synergies.

Life Worth Examining If you like AmerUs, you'll love...
Symbol	Name	P/E ttm	Yield	Market Cap	P/2006E	P/2007E	P/B	PEG Ratio
AEL	American Equity Investment Life	14.2	0.40%	575.21M	7.9	6.4	1.24	0.56
AIZ	Assurant	12.3	0.80%	6.22B	11.6	10.7	1.71	1.16
AMH	AmerUs Group	13.6	0.60%	2.56B	13.2	11.9	1.70	1.34
AMP	Ameriprise	19.8	1.00%	10.40B	13.5	11.7	1.42	1.31
DFG	Delphi Financial	15.7	0.90%	1.75B	13.1	11.7	1.68	1.07
GNW	Genworth	13.6	0.90%	15.95B	12.5	11.1	1.28	1.25
LNC	Lincoln National	11.3	2.70%	15.76B	11.8	10.5	1.56	0.97
MET	MetLife	9.1	1.00%	39.65B	10.9	10.2	1.38	1.06
NFS	Nationwide Financial	11.8	2.10%	6.64B	11.4	10.5	1.30	1.27
NWLIA	National Western Life	11.3	0.00%	840.42M	N/A	N/A	0.97	N/A
PL	Protective Life	12.9	1.80%	3.28B	12.0	10.6	1.56	1.25
SFG	Stancorp	13.9	1.20%	2.83B	13.5	11.6	2.03	1.31
TMK	Torchmark	13.0	0.80%	6.21B	12.5	11.5	1.93	1.27
AMH	AmerUs in the low $70s	14.9	0.55%	2.82B	14.5	13.1	1.87	1.47

Finally, AmerUs is not badly managed. I don't think Aviva can improve the management of AmerUs much; it's even possible that Aviva would mismanage what is at present a good asset. I've seen that with foreign acquirers of life companies before.

One final aside: In life-insurance deals, if they're done properly, the acquirer often does an independent actuarial valuation of the business in order to know what he is getting. Confidentiality agreements have to be signed, but once that is done, the acquirer can analyze what the business on the books is really worth and then decide if he is willing to pay a premium for the future business that will be obtainable from the target company.

That takes time to do and requires cooperation from the target company. If the valuation reveals that the deferred acquisition-cost assets, reserves or other accruals are worth more or less than their stated value, the bid level could shift. If it shifts down enough that the bid becomes no longer adequate to the target, the stock would probably undershoot after a failed bid because market participants would wonder if there wasn't something wrong at the target that is not publicly known.

My upshot: AmerUs and Aviva are in negotiations, but there is a lot that could happen prior to a formal deal being announced. I would not play in AmerUs at these levels, long or short. Aviva feels it needs to do a deal in the U.S. If the deal goes through, the price will probably be higher than today's quote. If it doesn't, the stock is likely to go back to the high $50s. Not a bet for me.

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