Aviva Investors’ prospects could be strengthened significantly after rumours of a deal between its parent company and Friends Life were confirmed.
With the expected transfer of Friends Life’s assets from rival managers to Aviva Investors in the event of a merger, the asset manager was highlighted as a potentially key beneficiary, as two of the UK’s largest insurers confirmed ongoing talks.
Friends Life currently outsources a large amount of its asset management and, by the end of 2014, will have £12.2bn (€15.4bn) with Schroders, significant legacy mandates with AXA Investment Managers and F&C Asset Management, and around £20bn in-house.
In March, Friends Life announced that it would shift equity and multi-asset mandates to Schroders from F&C, reducing F&C’s assets under management (AUM) by 17%.
In a statement to the stock market, however, Aviva said the combination of itself and Friends Life would create one of the UK’s leading asset management businesses.
“The transaction is expected to lead to a substantial increase in profits and assets under management at Aviva Investors through the addition, over time, of Friends Life’s [assets], materially increasing Aviva Investors’ total AUM,” Aviva said.
This would help turnaround Aviva’s struggling asset management arm and could trigger a significant shift of assets away from Friends Life’s existing providers.
Aviva Investors has struggled in recent years, suffering outflows and an inconsistent management structure.
Current chief executive Euan Munro joined in January 2014 after two interim CEOs took charge after the sudden department of Andrew Moss in 2012.
Munro has since been charged with overhauling the asset manager and introducing new products such as the AIMS multi-asset strategy.
At the end of 2013, the asset manager had £241bn in AUM after suffering £5bn in net outflows over the course of the year.
Mark Wilson, chief executive at Aviva, described the manager’s 3% contribution to the group’s operating profit in 2013 as “inadequate”.
AUM at the company has since fallen to £234bn at the end of June.
Based on the current offer and general agreement between the two boards, Aviva’s offer for Friends Life shares would see any deal reach more than £5bn.
Friends Life shareholders would own 26% of the new group, and the combined business would have 16m customers in insurance and savings.
In 2013, Aviva made £2.8bn in operating profit before tax, compared with Friends Life’s £436m.
According to reports, the move has been triggered by changes to the at-retirement defined contribution (DC) market that saw the removal of compulsory annuitisation.
Aviva and Friends Life were both major providers of individual annuities.
However, Aviva shifted focus to its bulk annuities business to make up for falling sales.
Any offer for the insurer has yet to be finalised, with Aviva having until 19 December to announce a firm takeover intention.
The company said there was currently no certainty the insurer would proceed with a deal.