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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 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 - Get Report) and MetLife (MET - Get Report). 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 - Get Report), which Aviva made a run at in March. Some others, such as National Western (NWLIA) and Nationwide (NFS), 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.

P.S. from Editor-in-Chief, Dave Morrow:
It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to's RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.

At the time of publication, Merkel and/or his fund was long Assurant and MetLife, though positions may change at any time.

David J. Merkel, CFA, FSA, is a senior investment analyst at Hovde Capital responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. Previously, he managed corporate bonds for Dwight Asset Management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Merkel cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

Analyst Certification: All of the views expressed in the report accurately reflect the personal views of the research analyst about any and all of the subject securities or issuers. No part of the compensation of the research analyst named herein was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in this report.

Merkel is employed by Hovde Capital Advisors LLC (the "firm"), a registered investment advisor with its principal office located in Washington, D.C. The Firm and/or its affiliates have or may have a long or short position or holding in the securities, options on securities, or other related investments of the issuers mentioned herein.

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