London/Amsterdam European buyout firm Cinven CINV.UL has agreed to buy Dutch insurer Aegon's (AEGN.AS) UK-based Guardian Life unit for 275 million pounds, the first step in a bigger plan to scoop up more British closed life funds.
Cinven said the deal, its third in the financial services sector, would provide an attractive foothold in the market and an opportunity to consolidate life funds which are closed to new customers.
"We see banking institutions and overseas insurers looking to exit the market, and that will facilitate this broader consolidation theme that we are very interested to participate in," Cinven partner Caspar Berendsen told Reuters in a telephone interview.
Berendsen said it was possible for Cinven to build a book of between 1 billion and 3 billion pounds of embedded value -- the key measure for closed life funds -- over the next few years.
The firm is targeting similar-sized deals to Guardian life, which manages more than 300,000 policies and has been closed to new business for 10 years.
In doing so, the firm will be up against the likes of Swiss Re (SRENH.VX), Phoenix Life PNXPL.UL and Chesnara (CSN.L) in competing for other closed-life portfolios.
Many small life insurers have closed their doors to new customers, because they do not have enough capital to underpin continued growth, focussing instead on profitably managing their "back book" of existing policies.
This has opened up opportunities for consolidators who make money by buying up blocks of closed life funds and squeezing out cost savings.
Such closed life portfolios provide "an excellent investment opportunity with attractive returns," Berendsen said.
For Aegon (AEG.N), which received financial aid from the Dutch state during the 2008 credit crisis, the deal is part of a divestment plan enabling it to repay the state, cut costs and focus on new markets.
It recently completed the sale of Transamerica Reinsurance operations to French reinsurer Scor (SCOR.PA) for about $900 million (548 million pounds).
Aegon shares were off 0.6 percent at 3:50 p.m., outperforming a 0.9 percent decline in the STOXX Europe 600 Insurance index .SXIP.
"Consistent with actions over the past three years to dispose of, or run-off, certain businesses deemed non-core, Aegon has concluded that managing the closed business of Guardian companies no longer fits with our strategic objectives," said Jan Nooitgedagt, Aegon's chief financial officer said in a statement.
Announcing its second-quarter results last week, Aegon said it was on track to reduce costs in Britain by 25 percent by the end of 2011.
Aegon Asset Management has a long-term agreement with Cinven and will continue to manage Guardian's total assets of 7.4 billion pounds.
(Reporting by Simon Meads and Sara Webb; Editing by Erica Billingham, Hans-Juergen Peters and David Hulmes; editing by David Hulmes)