Deals

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

AIA Group Ltd. has found a smart solution to a big cash pile and an over-reliance on China. It's buying Commonwealth Bank of Australia's life insurance business.

At first glance, the deal looks costly, even considering AIA's almost $11 billion money mountain. It's the firm's biggest to date, and the first under Chief Executive Officer Ng Keng Hooi. After the A$3.8 billion ($3 billion) purchase, Hong Kong-based AIA will be Australia and New Zealand's biggest life insurer. It's agreed with CBA to sell premiums to customers in those two countries for 20 years.

Taking Cover
AIA's acquisition of Commonwealth Bank's life insurance business is its largest ever
Source: Bloomberg

But the price tag is misleading. What AIA has cleverly done is a two-step deal that takes a lot of risk off its books. That's because AIA is selling a sizable part of CBA's existing policies on to reinsurers, bringing the real cost of the acquisition down to $1.5 billion. That's less than the $1.7 billion AIA forked out to buy ING Groep NV's Malaysian insurance business in 2012.

No Premium
At 1.1 times embedded value, CBA's life insurance business is going at close to the market median
Source: Bloomberg, Gadfly calculations
Note: Some companies include non-life insurance businesses. Calculation based upon market capitalization divided by latest full-year company-reported embedded value. Based on businesses reporting embedded value with market capitalization above $1B.

Firms keen on breaking into Australia's insurance market are increasingly going down the bancassurance route, and acquiring units of lenders. Unlike China or Hong Kong, AIA's biggest markets, Australia isn't one driven by agent sales. Most insurance policies are sold through independent financial advisers, retirement-savings funds, or by banks like CBA.

Last year, National Australia Bank Ltd. sold 80 percent of its life arm to Japan's Nippon Life Insurance Co. for A$2.4 billion, and Macquarie Group Ltd. offloaded its life unit to Zurich Insurance Group AG. AMP Ltd. and Australia & New Zealand Banking Group Ltd. are also considering sales of their life insurance arms.

The activity is indicative of the allure of bancassurance in Asia Pacific, even as the concept loses popularity elsewhere. Among the biggest bancassurance tie-ups in the region have been Prudential Plc's distribution deal with Standard Chartered Plc, Manulife Financial Corp.'s linking with DBS Group Holdings Ltd. and AIA's alignment with Citigroup Inc.

To be sure, growth isn't clear-cut. While Australia is relatively underinsured, the country's life industry has been struggling for several years amid rising claims and aging customers who are choosing not to renew policies.

Twilight Years
Net income from Commonwealth Bank's life insurance business touched a 14-year low this year
Source: Company reports

A greater risk to AIA, however, is reputational. CBA has been beset by scandals in recent months, including allegations of money laundering. Its existing life insurance business also isn't booming. Net income from the division came to A$263 million in the most recent fiscal year, the weakest in 14 years.

But AIA has a strong track record. Investors who are disappointed that the company's huge cash pile hasn't gone to paying bigger dividends needn't worry. This deal can work, and for the best.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net