American Skandia Goes on the Block
September 16, 2002
If Wade Dokken, CEO of American Skandia, is a betting man, he may be about to lose his shirt. In March of this year, when MFMN asked him about the likelihood of a sale of the company, he responded, "I'll take all those side bets."
Skandia Insurance Co. is poised to back out of the American market by selling American Skandia, its U.S. variable annuity and mutual fund arm. Jefferson Pilot Financial of Omaha, Neb., is said to be paying $600 million for the Shelton, Conn., insurance company, which, with $23.1 billion in assets, is the 10th largest annuity company in the U.S.
Why would a company with a decidedly global stance divest itself of its American presence? Skandia's American executives believe the parent company has been impeding the firm's growth, sources said. In addition, there has allegedly been tension over the U.S. firm's exorbitant, multi-million-dollar marketing costs. Skandia's parent company recently decided to pull the plug on funding American Skandia's marketing expenses, and as a result, the U.S. firm had to take out bank loans to cover those costs, sources said.
Patti Abram, chief marketing officer for American Skandia, said that Skandia has continued to support the company's marketing efforts and has supplied most of the capital to fund new business.
American Skandia announced it would lay off 40 employees in April and has since put plans to hire 15 wholesalers on hold, citing poor market conditions [see MFMN 8/5/02]. Many insurers are facing dwindling assets and downgrades [see Annuity Market News September 2002]. American Skandia, which, with its aggressive marketing has become one of the best-known annuity companies in the industry, has not faced downgrades and has held fairly steady in 10th place.
Although American Skandia has long been rumored to be for sale, or looking for a merger, only now has serious discussion of a transaction emerged. "We understand that American Skandia is for sale, and Goldman Sachs is handling the assignment," said Rhonda Rosen, managing director at Putnam Lovell N.B.F. in New York.
Abram declined comment but did confirm that a Goldman Sachs partner is on Skandia's board. A Goldman Sachs spokesperson also declined comment. Representatives from Jefferson Pilot were not available for comment.
"It seems reasonable that Jefferson Pilot would have an interest in American Skandia, as they have expressed an interest in expanding their variable annuity business. A price of $600 million would represent approximately one times book value. This multiple might increase if there are any write-downs from deferred acquisition costs," Rosen said.
Jefferson Pilot, which has adopted an acquisition strategy, may be due for another purchase, as it last bought Guarantee Life Insurance Co. in 1999, according to analysts at Standard & Poor's in New York.
However, the deal has not yet been inked, and Goldman Sachs has orchestrated several failed sales in the asset management and insurance industry, including an aborted offering of Allmerica Financial of Worcester, Mass., earlier this year. Before that sale eroded, Lincoln Financial was reported to be the last buyer standing at the table, but the deal fell through in part because the company did not reinsure much of the risk from its guaranteed death benefits and had failed to report deferred acquisition costs.
Financial stability ratings have become a more significant issue for American Skandia in recent months. The company, rated at A+, is currently on credit watch with Standard & Poor's. The company expects to resolve its rating by the end of the month, said Robert Hafner, associate director at S&P. One of S&P's concerns is a lack of diversification beyond equity-linked vehicles such as variable annuities and mutual funds that generate fee income for the carrier. Jefferson Pilot is rated AAA with a negative outlook with S&P.
Some published reports have stated that only the variable annuity arm of American Skandia will be sold. Sources said that the Swedish parent favored such a divestiture, but Skandia is likely to sell the entire unit because the remainder of the company is so small. Out of $27 billion in assets under management, $22.6 billion is in variable life and annuities. Variable annuities account for 70% of sales and 90% of profits, said Abram, who added that the mutual fund business is not large enough to stand on its own.
Furthermore, American Skandia has structured its mutual fund and variable annuity and variable life offerings to provide similar investment options. By splitting up the product lines, American Skandia's buyer would likely have to make significant and costly adjustments to its mutual fund product line to achieve a similar result. Furthermore, it would lose the 529 college plan business, a small but promising area of asset growth.
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