- Posted by irishhealthinsurance
- On February 15, 2016
It has been widely publicised that Aviva Health is up for sale, having first hit the headlines in November 2015. But what does this mean? Speculation is rife that the sale and purchase is almost a fait accompli at this stage. So for those interested and before any full and final announcements are made, this article hopefully summarises the whys, when’s and who’s of the whole process.
Rather than presenting the “he said, she said” view of the current status, let’s start with a few questions which might help us understand where we are, how we got there and the most likely outcomes.
- Why put the business up for sale?
- Who would be the most likely buyer?
- When would it be likely to sell?
Why put the business up for sale?
Back in 2011 Aviva Ireland went through major restructuring which included 950 redundancies. This period of uncertainty had a visible effect on morale and only two years later Aviva Ireland saw further restructuring when its Life and Pension business became a branch operation of its parent company in the UK. The move was reported to be aimed at improving capital synergies in advance of new European legislation called Solvency II which will see more stringent capital requirements being placed on Insurance Companies.
In fact the same legislation is being used as a partial explanation as to why Aviva Health is now for sale! Aviva Health was not back ended into the UK operation as part of the 2014 restructuring, due to the fact that it was only 70% owned by Aviva, the other 30% being owned by AIB. This goes back to the days before Aviva purchased the health business Vivas Health which was set up by Oliver Tattan & Stephen Loughman (ex Vhi) and was a joint venture with AIB who took a 30% shareholding and also saw Dermot Desmond as a stakeholder. When the business was sold to Aviva, AIB retained their 30% shareholding.
In the post recessionary market pressure has been brought to bear on State owned/rescued banks (BOI & AIB) to return to core business and to see government borrowings repaid to the State and taxpayer as soon as possible. In the case of AIB, the Irish State now owns a shareholding of approximately 99.8%. As part of the banks restructuring, AIB was also forced to sell its 22.5% stake in M&T Bank in the US. This may also indicate why AIB expressed an interest in selling its shareholding in Aviva Health. Aviva’s contention is that it has gone to market to ascertain the true value of that shareholding and to then purchase it so as to fully control the business. If this is the case, then it is most likely that the Health business would also be back ended into the UK in a similar fashion to the Life and Pensions business and to strengthen its financial position.
So this was the official Aviva response once the market was aware of the sale. Ordinarily it might be considered farfetched to suggest that Aviva had to go to the market to value the company. However credence was lent to this contention due to the fact that AIB was effectively a State Asset and as such, subject to greater accountability, transparency and scrutiny, which would require an open market valuation.
So we now know the official reason why Aviva Health is up for sale. However that doesn’t necessarily mean that an external offer might prove attractive enough for Aviva to consider selling it after all! In fact it is recorded that a former Chief Executive of Aviva Health, who took office soon after the Aviva restructuring of 2011, made it clear at that time that if offered €50 Million for the health business, he would sell it. All figures suggested as to the current value of Aviva Health have been placed at a minimum of €50 Million! So there is good reason for scepticism on Aviva’s official line.
That said, Aviva Health is a very profitable business as health insurers go and carry a more attractive demographic than the other 2 larger insurers Laya Healthcare & Vhi. In fact in 2013 Aviva Health recorded a pre tax profit of €18.06 Million, an increase of 151% on the previous year. While that market share has hovered at around 17% for a number of years now, it could be argued that the demographic of its book, as well as the pricing model, has been managed very well with respect to its profitability. So if someone is interested in a buying an Irish Health Insurance business, Aviva Health probably represents a very attractive one.
When is the sale likely to close?
Firstly Aviva managed to get through its largest corporate renewal period in December after news broke of the sale which will no doubt be of great comfort to both Aviva and any perspective buyer. Two reasons for this would be as follows:
- Bigger Corporate clients generally require a few months to prepare for an insurer switch and indeed to digest and choose from the alternative options the market has to offer. So learning in the month of renewal that there might be a sale would not warrant any hasty action.
- Big companies (and indeed small ones) have all seen this before. In fact never more so than in the past 8 years. We have seen insurance companies sold, merged, go into receivership, banks taken into State ownership. Indeed, in the Irish Health Insurance market alone we have seen one health insurer (Quinn Healthcare), go into receivership then sold with the involvement of a new Reinsurer and underwriter (Swiss Re and Elips Insurance), then rebranded (Laya Healthcare) and ultimately acquired by insurance giant AIG. We also saw a new insurer (GloHealth) enter the market Vhi finally regulated as recently as July 2015. So having been though all this before, many consumers will wait until the dust settles to see how likely this is to effect them.
However any value attached to Aviva Health would suffer if business was to start falling off the books between now and the sale, so it will be in the best interests of both Aviva and the eventual buyer if the sale was completed as soon as possible. In my reckoning that will be before the end of the first quarter of 2016 and if the amount of recent media speculation is anything to go by, I wouldn’t be surprised if it is announced at the end of next week or later in February!
Who would be the most likely buyer?
Ireland has a pretty bad record of attracting foreign health insurers into the Irish Market. BUPA being the only one soon pulled out on foot of Government inference (as they saw it). So in my view it was always most likely to be a domestic insurer even if 10 expressions of interest have been reported. As far as current health insurance providers go, that narrows the possibilities down to three, Vhi, Laya Healthcare & GloHealth.
- One would imagine that the recent costs involved in the AIG/LAYA takeover would take LAYA out of the picture.
- For the newly regulated VHI, one would imagine that the increased costs of compliance coupled with the new costs of having a reinsurer for the first time would have made the purchase of Aviva Health a non runner for them also. That is to say nothing about the likelihood of such a merger being allowed by the Competition Authority.
However both insurers may well have used the sale as an opportunity to look under the bonnet of how Aviva works and the structure of the whole business, particularly as Aviva also has a sizable intermediary channel accounting for about 50% of its business, something the other two don’t.
- This therefore leaves Irish Life as the most likely buyer as a 49% stakeholder in GloHealth, a health insurer that also operates in an intermediary market.
The natural question to follow is, what happens to GloHealth? Rather than purchase Aviva Health and have it run in competition with another health business of which Irish Life holds a 49% shareholding, it would seem logical to merge the two. Whether this would see a rebranding of the business to ‘Irish Life Health’ or whether it would continue to operate as GloHealth remains to be seen. However given that all three of the gentlemen involved in the initial set up of GloHealth are the very same people who set up and sold Vivas Health (Jim Dowdall, Oliver Tattan & Stephen Loughman), there is certainly precedence to suggest that this could be an opportune time for them to ride off into the sunset with a healthy return on the sale of a 51% GloHealth shareholding.
Where are we now?
My understanding is that the process is currently in a closed bidding phase for over a week now with only Aviva & Irish Life contending for the business. Speculation among the media is strongly suggesting that Irish Life is the most likely buyer but there will be those in Aviva who would no doubt like to see them continue to run the business as a going concern. The fact that Aviva Ireland operates as a branch network of the UK could mean that any genuine wish to retain the business by Irish Management may ultimately have little influence on the UK’s decision making. It is hard to know whether the market reducing to 3 insurers is a healthy thing given that it took 59 years to get to a market of 4 insurers. In fact this month sees Vhi turn 59 years old.
Regardless of the outcome, customers will have little to worry about on any transition much like we have seen with the various banks and insurers before them, however seeking expert advice from an independent advisor at a time like this, is never time or money wasted.
Irish Health Insurance