AIA Group Ltd.'s planned US$3.04 billion acquisition of Commonwealth Bank of Australia's life insurance units in Australia and New Zealand will widen the gap between the Hong Kong-based insurer and its rivals in the two markets, though the impact on the group's overall business will be limited, analysts said.
"AIA in Australia has a strong independent financial adviser channel and now it has obtained a 20-year strategic bancassurance partnership with CBA and [CBA's New Zealand subsidiary] ASB Bank Ltd.," said Katherine Hu, director of Hong Kong and China insurance at Bank of America Merrill Lynch in Hong Kong.
By bulking up the bank distribution channel, "AIA has secured its market position [in Australia and New Zealand] and new business growth," said Ma Ning, a Hong Kong-based analyst at Maybank Kim Eng Securities.
AIA unit AIA International Ltd. agreed to acquire all of Australia-based Colonial Mutual Life Assurance Society Ltd., or CommInsure, and New Zealand-based Sovereign Assurance Co. Ltd., and form 20-year strategic bancassurance partnerships with CBA and ASB Bank. The agreements in the two markets will add 13 million customers for AIA, the group said in a Sept. 21 release disclosing the deal.
"Australia's life insurance market is more mature than other Asia-Pacific markets," Ma said. "But the demand for protection products is still there."
As of March 31, AIA Australia was the second-biggest life insurer in Australia with a 14.5% market share, behind Dai-ichi Life Holdings Inc.'s TAL Group and its 16.7% market share, according to statistics from research firm Strategic Insight. CommInsure was fifth, with a market share of 10.6%.
The consolidation will give AIA about a one-fourth share of Australia's life insurance market.
"AIA will significantly widen the gap with peers [in the Australian market]," Hu said.
Meanwhile, in New Zealand, the deal for Sovereign will make AIA's life insurance operations the largest in the country in terms of in-force premiums. Prior to the deal, Sovereign was the biggest life insurer in New Zealand by in-force premium while AIA's local unit ranked eighth in the 12 months through March, AIA said, citing statistics from NMG Consulting.
But with Hong Kong and China accounting for the bulk of AIA's regional footprint — 69.9% of the group's first-year premiums in the first fiscal half ended May — analysts expect the deal to have a limited impact on the company's overall operations.
Further, the actual cost of the deal is also smaller than the announced US$3.04 billion figure, AIA said. With a free surplus of US$165 million within CommInsure and Sovereign, which refers to the entities' capital surplus to requirements, and AIA reinsuring the majority of their in-force business, the effective net cash outlay would only be about US$1.50 billion, or 13.7% of AIA's free surplus of US$10.96 billion in the first half ended May.
"It's a small impact on AIA Group's capital," Ma said, adding the transaction makes better use of AIA's excessive cash over simply holding excess capital. Ma added that investors have been concerned about the group's capital management plan, given its solvency position of 427%, which is much higher than the Hong Kong regulatory requirement of above 100%.
Some of Australia's major banks are trying to divest their life insurance and wealth management arms to release capital in response to tightened capital requirements for financial institutions.
In late August, AIA Group withdrew from a potential bid to acquire Australia & New Zealand Banking Group Ltd.'s life insurance and wealth business, which was valued at about A$5 billion, The Australian Financial Review reported.