By Huw Jones and Carolyn Cohn
LONDON (Reuters) - British insurer Aviva (L:AV) agreed terms on Tuesday for a 5.6 billion pound ($8.8 billion) all-share takeover of rival Friends Life (L:FLG), responding to pressures caused by pension industry reform.
Pension providers are rushing to revise their product ranges after the government in March surprisingly removed obligations for people to buy an annuity, or income for life, at retirement, hurting sales.
Aviva said the merger creates a market leader with 16 million life insurance customers. It is expected to generate 600 million pounds in excess cash flow a year and about 225 million pounds in annual cost savings by the end of 2017.
Andy Briggs, current group chief executive of Friends Life, will become CEO of Aviva UK Life, with Mark Wilson continuing as CEO of the enlarged Aviva Group.
Briggs told reporters that the two businesses worked well together. Friends Life's corporate pension business is skewed to larger firms, while Aviva focused on smaller ones, alleviating any concerns about a reduction in competition.
"There's a very good complementary fit," he said.
After the changes announced by the government in March, insurers have focused on alternative products such as pensions drawdown which allow savers more freedom over the amount of money they withdraw each year, or "bulk annuites" - taking on the risk of company defined benefit pension schemes.
WILSON'S STRATEGY
Wilson said there would likely be job losses among the combined staff of more than 15,000 and savings from office moves but would not give any specific details. Analysts have speculated that Friends Life would close its London office.
The deal is a significant step for Wilson, who was hired as CEO of general and life insurer Aviva from Asian rival AIA (HK:1299) two years ago. He has pushed through a restructuring, selling off businesses and cutting costs.
Analysts said the cost savings from the Aviva/Friends Life combination were higher than expected but would take several years to be achieved.
The merger has the backing of Clive Cowdery, who founded Friends Life in 2008 when it was known as Resolution. Aviva is the product of a 2000 merger between CGU and Norwich Union.
Holders of Friends Life shares will receive 0.74 new Aviva shares, valuing the company at 5.6 billion pounds, unchanged from last month's initial announcement.
Aviva shares fell after last month's announcement due to uncertainties over the savings numbers.
They were up 2.7 percent at 513 pence at 1035 GMT, while Friends Life was up 4.8 percent at 384.1 pence. The deal values Friends Life shares at 394 pence, based on the closing price on Nov 20.
Credit Suisse analysts said they were neutral on the deal.
"While it accelerates near-term cash generation and thus dividend recovery, it raises longer-term questions about growth once initial synergies are extracted," they said.
Friends Life shareholders will also receive a second interim dividend of 24.1 pence per share. Aviva plans to pay a final dividend of 12.25 pence for 2014, up 30 percent on last year.
Morgan Stanley, JPMorgan Cazenove and Robey Warshaw advised Aviva. Friends Life was advised by Barclays, Goldman Sachs and RBC Capital Markets.
(Reporting by Huw Jones and Carolyn Cohn; editing by Jason Neely/Keith Weir)