The Commonwealth Bank has sold its troubled insurance business CommInsure Life to a Hong Kong-listed group Chinese-owned for $3.8 billion.
The deal with AIA Group also covers the sale of the CBA’s New Zealand life insurance arm Sovereign.
The sale of CommInsure Life follows a scandal where the insurer was accused of using outdated medical definitions to delay or deny payments to policyholders, and pressuring medical assessors to reject claims.
As part of the CommInsure and Sovereign sale, the CBA also announced its head of wealth management Annabel Spring will leave the company in December.
Ms Spring had oversight for the CommInsure business and was under constant criticism as CBA managed the scandal after an investigation by the ABC’s Four Corners and Fairfax Media.
The sale of CommInsure had been flagged in CBA’s full-year results last month although, at the time, the company said the future sale of the insurer was uncertain.
The purchase by AIA includes a 20-year partnership agreement to continue providing insurance products to customers in Australia and New Zealand.
In a statement released to the stock exchange, the CBA confirmed that CommInsure and Sovereign customers will retain current benefits in existing policies.
AIA is the largest publicly listed insurance group in Asia and already has established life insurance businesses in Australia and New Zealand.
Under the sale, the CBA will continue to earn income from its life insurance products already in place.
CBA will also retain the CommInsure brand and continue to sell general insurance under it.
CBA ponders $4b Colonial First State split, IPO
At the same time as announcing the sale of its life insurance business, CBA also announced a strategic review of its funds management business, Colonial First State Global Asset Management.
The sale of CommInsure Life and Sovereign will end up in a $300 million loss for CBA, but also release about $3 billion of capital for the bank.
The banking regulator APRA earlier this year released increased capital requirements to take effect at the start of 2020, with analysts estimating that CBA would have at least a $4 billion shortfall under the new rules if it did not raise more funds.
APRA has also hinted that it will require the major banks to hold more capital — which is the reserves of funds they can reliably draw on to cover potential losses — in relation to residential mortgages.
Citi bank analyst Craig Williams said the CommInsure sell-off now means Commonwealth Bank can meet APRA’s 2020 requirements, but it may need to raise more money if it cops a large fine over money laundering law breaches.
“A large fine accrued in settling the AUSTRAC legal action may take CBA below this minimum threshold again, albeit a sale or IPO of the Global Asset Management business (now subject to strategic review) is likely to release sufficient capital to eliminate any shortfall,” he wrote in a note.
It is not yet clear how much CBA’s review of Colonial is related to raising additional capital through a sale or initial public offering (IPO) — separate share market listing — of the wealth management business.
It is possible that CBA could ultimately decide not to proceed, or to give its existing shareholders the equity in a standalone firm.
With $219 billion of funds under management, Colonial is one of Australia’s largest asset managers.
To give a very rough sense of its potential standalone value on the share market, listed fund manager Platinum Investment Management is currently valued at $3.6 billion, and Colonial is almost ten times bigger in terms of assets under management.
However, Platinum makes a lot more profit on each of those dollars under management — it reported a $186 million net profit for the 2017 financial year.
Based on the Colonial First State Global Asset Management division’s profits of $229 million in CBA’s last annual report, it seems a market valuation between $3.5-4.5 billion may be closer to the mark, at 15-20 times its earnings.
CommBank still dealing with multiple scandals
Commonwealth Bank chief executive Ian Narev was putting a positive spin on offloading its insurance business given the scandals that damaged the reputation of CommInsure.
“Providing our customers with access to high quality products and services for all their financial needs is core to our vision of securing and enhancing financial wellbeing,” Mr Narev said in a statement.
“We have said for some time that while distributing life insurance is a fundamental part of that strategy, we were open to different models for doing so.”
The fallout from CommInsure comes as CBA deals with the latest scandal involving almost 54,000 alleged breaches of anti-money laundering regulations.
As a result, CBA chairman Catherine Livingstone ordered that the bank’s executive team including Ian Narev have their short term bonuses cut to zero.
Succession planning for Ian Narev’s replacement has been expedited and Mr Narev will leave the CBA by 30 June 2018.
Commenting on Annabel Spring’s confirmed departure, Mr Narev said Ms Spring had led the CBA’s insurance arm during “challenging and changing times” for the insurance industry.
“She has shown determined leadership in addressing complex and long-standing issues in the businesses while growing and transforming the businesses culturally, technologically and strategically,” Mr Narev said.
The Commonwealth Bank’s share price has suffered as a result of the most recent scandal involving money laundering allegations closing yesterday at $76.29 after reaching more than $93 in March 2015.
However, APRA has faced criticism from banking experts and parliamentarians over the inclusion of its former chairman John Laker on the inquiry panel.