Aviva USA's Fixed Annuity Business Sale Finalized

Date posted: October 7, 2013

It’s been almost a year, but the deal to purchase Aviva USA’s annuity business is finally complete.  The Des Moines Register, which has an active interest in this story since the company is located in Iowa, offers up the details in “Apollo completes Aviva USA deal for $2.6 billion.”  Victor Epstein writes that the deal ended up costing Apollo Global Management $800,000 more than their original offer of $1.6 billion back in December of last year.  State insurance regulators spent a long time evaluating the sale of Aviva USA to private equity firm Apollo.  They will be incorporating Aviva USA’s annuity business into their Athene insurance unit and renaming it Athene USA.  While keeping the majority of the annuity business in tact, Apollo sold the life insurance business to Global Atlantic Financial Group.

Retirees and financial planners like the steady returns of annuities, which has kept them popular over the years.  Athene plans to strengthen their place in the retirement services market through their integration of Aviva USA’s annuity business into their corporation.  They say that they will continue to offer exceptional service as well as consistent results for annuity holders.  The company’s annuity sales have decreased since Aviva USA was on the market, but that isn’t really surprising.  While overall indexed annuity sales increased 5.5% since the same time last year, Aviva USA’s indexed annuity sales went down 55%.  Unfortunately for the Des Moines area, employment at the facility has also decreased since Apollo took over the annuity company.  Iowa’s Insurance Commissioner says that he is sympathetic to those who have lost their jobs, but stresses that Apollo plans to keep their new annuity business in Des Moines.

Athene will now be one of the biggest fixed annuity companies in the United States after gaining the fixed annuity business of Aviva USA.  They now have $60 billion in assets and plan to expand their annuity business by more acquisitions in the future.  Athene’s parent company, Apollo, is increasing its assets under management more than threefold by this purchase.  Apollo will provide asset allocation and investment management services for the new Aviva USA business just as it does for Athene’s other annuity business.  Now that the sale has been finalized, we’ll have to continue watching to find out how Athene’s acquisition of Aviva USA’s annuity business changes the overall annuity landscape.  The large decline in indexed annuity sales was likely due to uncertainty related to the business sale, so the future sales will be a better indicator of the impact of this annuity sale.

Fixed Annuities Provide Most Retirement Income When Future Markets Are Down

Life would be much easier for everyone if we had a crystal ball to see into the future.  Since we don’t, we need to be prepared for all possible scenarios in life, especially when it comes to planning for retirement.  Steve Vernon of CBS Moneywatch uses some helpful graphs to help us “Choose the best ways to generate retirement income.”  When you are figuring out how much income you will receive from your retirement savings, the current economic conditions should only be one of many things you look into. 

It’s important to see how your different options for generating retirement income will change based on good market conditions and bad market conditions as well.  So-called scenario planning is a good way to see how your income generator will work in both best and worst case situations, as well as everything in between.

In the first graph, made by Dr. Wade Pfau, six different retirement income strategies are evaluated in a negative economic future. 

The guaranteed income of the different annuity products performed the best when future economic conditions were negative.  Inflation-adjusted annuities provided the highest income after 30 years out of all six strategies researched.  They were followed by the immediate fixed income annuity, which provided the second highest income after 30 years.  Fixed annuities are not affected by market performance, so when markets decline, they certainly pay off as a good investment. 

Using constant systematic withdrawals, equivalent to the 4% rule, proved catastrophic in a negative economic environment.  Retirement income dropped to zero after 20 years and there was nothing left for the remaining 10 years that were studied, not to mention any additional years that you may actually live.

Both graphs use the same scenario to get their results: a 65 year old couple with $100,000 in retirement savings.  The second graph determines how your inflation-adjusted retirement income would change if economic conditions proved to be more favorable in the future than they are today.  In this scenario, you get the most income from strategies that invest your retirement income and pay you a percentage of that.

This makes sense, but are you willing to take the gamble on the markets being favorable right when you decide to retire?  Since the fixed annuities listed don’t change with the markets, they provided the least income of the studied methods when markets were up at retirement.  But their income was consistent in both graphs, something that provides peace of mind during retirement.

Behavioral science has shown that we as humans are more hurt by financial losses than we are pleased with unexpected financial gains.  What this and these graphs show us is that diversifying retirement income strategies may be the best way to protect and provide income in the future.  

Always be prepared with guaranteed income in case the scenario that you hope to happen is not the true life situation.  By assuming the worst and preparing for that with guaranteed income streams, you are protected either way.  If you want to use some of your retirement savings in the markets just in case the scenario is favorable, that could be a good option too.