Aviva

The UK's largest insurance services provider, Aviva (AV) announced last week plans to acquire AmerUs Group for £1.6 billion in cash. The purchase will immediately transform operations in America providing Aviva with a significant position in a high growth segment of the world's largest savings market.

AmerUs offers a range of protection and accumulation products, however equity-indexed products have been the focus over the last few years. These products typically offer minimum guaranteed benefits with the potential for higher returns based on the performance of an underlying index.

Growth in these products has been impressive and AmerUs has an enviable market share. AmerUs' three year compounded annual growth rate (CAGR) to 2005 in both equity annuity deposits and protection sales has been 35 percent. As such, we believe Aviva's choice of acquisition target is a wise one.

Aviva's purchase price of US$69 a share represents a 10 percent premium to AmerUs' closing price the day before confirmation talks between the two were taking place. Despite the premium, we believe the offer price is fair.

Besides America, Aviva is also expanding in other exciting markets. In March of this year, the company received a license to operate in Russia. Whilst in China, the company received regulatory approval for the joint venture, Aviva-COFCO, to operate in the city of Jinan. The JV now has licences to operate in 12 cities.

All of this activity has overshadowed the outstanding performance Aviva has thus far put in this year. In a recent trading update, Aviva said that first half pre-tax profits surged ahead 43 percent to £1.35 billion. The group's new business sales growth has continued in the second quarter where the first ended, up 20 percent.

General insurance also performed well. The segment's combined operating ratio (COR), a key measure of profitability, in the first half of the year was around 93 percent. This figure is well below Aviva's target of 98 percent, although by year-end the COR is expected to worsen slightly to 95 percent.

Aviva currently trades on an undemanding prospective price earnings multiple of nearly 9 times while yielding 4 percent. In our opinion, the growth prospects offered by last week's announcement along with initiatives in China, Russia and India bode well for future earnings out-performance in the years ahead.