Before understanding types of fixed income, investors must understand the capital structure. In its simplest…
For recent decades the Australian life insurance market has been dominated by the major banks and AMP. After a short-lived attempt to expand into Asia by the then National Mutual Life Association of Australasia, Australia has not produced a meaningful and competitive international life insurer. Today, even the big banks are shedding their remaining life insurance arms, making way for international giants of the industry, who are finally coming to these shores.
Suncorp became the latest bank to commence a sales process for its Australian life insurance business, after first revealing the plan in February. Based on industry valuation norms, the sale could fetch as much as $2 billion. Large Japanese life insurers (amongst others) are believed to be interested in buying the business. CBA earlier this year sold its own life insurance operations to AIA for $3.8 billion. Macquarie Group last year sold its life insurance arm to Zurich and NAB announced a sale of an 80% stake of its business to Nippon Life in 2015. AMP is also considering a sale of its life insurance operations and ANZ currently has its life business up for sale through Goldman Sachs with MetLife a rumored strong runner. If these sales proceed, it will leave Westpac as the only major bank to retain an in-house life insurance arm. As the sole ‘local’, this may well become a competitive advantage for the bank in due course – against the current logic and rationale for exiting life businesses. Of course, should it too decide to exit, it could equally find a poorer outcome as the last to do so.
Australian banks initially got into the life insurance sector believing that when combined with superannuation and investments, it would provide additional, diversified revenue streams in a high-growth area. But this has not materialized with the sector hit by rising claims, high lapse rates, lofty upfront commissions to third parties and higher regulatory capital requirements. Collectively, insurers have been losing money in four of the past five years. In theory, global players have the economies of scale on pricing and are able to better absorb shocks and spread them across a global portfolio.
The steady unwinding can be seen as an eventual acknowledgement by the banks of their core competencies and the implications of their evolving regulatory environment, since life insurance is a capital- and reputation-intensive business, and banks have faced large increases in main regulatory capital requirements. Earlier this year, APRA determined that the major and regional banks would have to increase their Common Equity Tier One (CET1) ratios by 1.5% and 0.5% respectively by 2020. Divesting life insurance arms can give banks a quick fix and should allow them to meet the APRA requirement almost immediately. For example, CBA’s sale to AIA will lift its CET1 ratio by 70 basis points, or from 10.1% to about 10.8%, meeting its APRA expectation (10.5%) in one easy transaction. Similarly, Suncorp and ANZ are expected to shore up their CET1 ratios post completion of their sales.
Overall, we see the trend as beneficial to both the Australian banking and life insurance markets, as banks re-focus on their core banking operations with stronger capital and large global insurers potentially able to offer better priced products to be benefit of Australian consumers.