AIA Buys Commonwealth Bank of Australia’s Life Insurance Business for A$3.8B

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AIA Group Ltd. agreed to buy Commonwealth Bank of Australia’s life insurance business for A$3.8 billion (more than $3 billion), in its most ambitious foray beyond the Hong Kong-based company’s core markets in Asia.

AIA will team up with Commonwealth Bank for 20 years under the deal to provide life insurance products to customers in Australia and New Zealand, Sydney-based CBA said in a statement Thursday. The deal would make AIA the biggest life insurer in Australia and New Zealand, giving it access to 13 million customers of the largest retail bank in Australia and second-largest retail bank in New Zealand, a number equal to more than 40 percent of the combined population of the two countries, the insurer said Thursday.

For AIA, the deal represents the largest on an absolute basis, bigger than its 2012 purchase of ING Groep NV’s Malaysian insurance business, according to data compiled by Bloomberg. On a net cash basis, AIA said it expects to pay $1.5 billion, less than the $1.7 billion it paid for the Malaysian business.

The deal is the first announced under Chief Executive Officer Ng Keng Hooi and represents a move beyond Hong Kong, China and Southeast Asia into markets where earnings growth has been volatile in recent years. In a note published on research service Smartkarma, Thomas Monaco cited the CBA business’s flat premiums and declining insurance operations.

“In addition to this deal not making much financial sense, AIA is now stretching beyond its core markets of East Asia and heading into two markets that have limited growth potential,” Monaco wrote. “This deal is further evidence that the days of the thrifty former CEO, Mark Tucker, are well behind AIA.”‘

AIA shares were little changed at HK$60.10 in Hong Kong trading on Thursday, with year-to-date gains of more than 37 percent.

Net Cash

Flush with cash, AIA has faced investor and analyst pressure to put its surplus capital to use. In 2013, it agreed on a 15-year deal to sell insurance in 11 regional markets through Citibank branches.

AIA will strike reinsurance agreements to cover the majority of the target’s existing insurance policies in its latest deal. Combined with the free surplus of the business, it will reduce the net cash payment to the lower amount, it said in its statement.

The purchase will “significantly expand AIA’s access to potential new customers and enable us to engage them in a new way,” AIA’s Ng said pointing to the bank’s extensive branch network. AIA said it expects the transaction to generate ongoing pretax cost savings of at least $60 million per year within three years of completion.

“It’s a good deal for CBA and a statement of intent from AIA that shows they are serious about the Australian market,” said David Walker, portfolio manager at Clime Asset Management. “They are welcome to it as well: in recent years it hasn’t been a good sector for local investors due to its earnings volatility.”

Australia is the largest life insurance market in the Asia-Pacific region outside Japan, AIA’s statement said. It and the CBA Australia life insurance unit are the second and fifth-largest provider of life protection in the country before the acquisition.

AIA had group insurance and sold policies through independent financial advisers in the two countries before today’s deal. It lumps its Australia and New Zealand into “other markets” with eight other geographies including Indonesia, Taiwan and the Philippines. The group accounted for 9.9 percent of its new business value in the six months to May 31, according to its interim results announcement.

AIA is also among shortlisted bidders for Australia & New Zealand Banking Group Ltd.’s wealth unit, people familiar with the matter said in July.

Commonwealth Bank also said it’s considering a potential spin-off of its Colonial First State Global Asset Management business, which oversees A$219 billion.

For Commonwealth Bank, the sale is expected to boost its common equity Tier 1 capital by A$3 billion, or 70 basis points, according to the statement. It is expected to result in an accounting loss of about A$300 million after tax. The deal, expected to be completed by the end of 2018, excludes CBA’s stake in BoComm Life Insurance, a joint venture in China. The bank is “actively engaged” in exploring options for that stake, which depend on Chinese regulatory approval, it said in a presentation to investors.

Insurance Controversy

At a time when the bank is facing allegations it repeatedly breached money-laundering laws, the deal also rids the bank of one of its more controversial businesses. The CommInsure business has faced intense public and political scrutiny after accusations it wrongly failed to honor insurance claims to sick clients. A Deloitte report earlier this year cleared the bank of any “systemic” problems.

“This is the start of CBA’s long process of reputation fightback after the issues of the last few years,” said David Ellis, banking analyst at Morningstar.

It’s also the latest of Australia’s big banks to seek an exit from its add-on businesses, as they focus on the higher-yielding domestic banking operations. ANZ is in the process of selling its wealth arm, which includes life insurance and fund management operations, as part of a plan to dispose of legacy assets and focus on its core business. National Australia Bank Ltd. sold 80 percent of its life insurance business to Nippon Life Insurance Co. for A$2.4 billion in 2016.

As part of the shake-up of its wealth businesses, Annabel Spring, group executive for wealth management, will leave Commonwealth Bank in December.

JPMorgan Chase & Co. was the financial adviser to CBA on the deal, and Evercore Inc. advised AIA.