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Aussie life insurance sale to reduce earnings volatility, boost EPS for Suncorp

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Aussie life insurance sale to reduce earnings volatility, boost EPS for Suncorp

Suncorp Group Ltd. has ended more than a year of internally considering a sale of its capital-intensive Australian life insurance business by agreeing to off-load the business to TAL Dai-ichi Life Australia Pty. Ltd., a subsidiary of Japanese insurer Dai-ichi Life Holdings Inc.

Analysts expect the A$725 million deal to boost Suncorp's return on equity and reduce its earnings volatility.

"The Australian [life insurance] business of course is … very capital-intensive and is quite dilutive to ROE," CEO and Managing Director Michael Cameron said during an Aug. 8 earnings call.

Suncorp's cash ROE was 8.0% in the fiscal year ended June 30, a figure it expects to increase to 10.0% in the current fiscal year before considering the positive impact of the life insurance divestment. "The impact of the divestment of the life business is likely to be a small positive this year and obviously very positive going forward," Cameron added.

The transaction will cut absolute profit, but because the life business required so much capital, it will increase ROE, said Charlie Green, director of Brisbane, Australia-based Hunter Green Institutional Broking. Green's fund holds shares of Suncorp.

The Australian financial group said the deal is expected to be completed by Dec. 31, pending Japanese and Australian regulatory approval. It estimates that the transaction will result in a noncash write off of A$880 million and proceeds of around A$600 million to shareholders in the fiscal year ending June 30, 2019.

The deal will come with a 20-year strategic alliance with TAL to offer life insurance solutions via Suncorp's Australian distribution channels.

Suncorp's fiscal year net profit dipped 1.5% year over year to A$1.06 billion, although post-tax profit from Australian life insurance rose 70.6% to A$58 million, which CFO Steve Johnston attributed to "repricing, claims initiatives and product rationalization."

Earnings from the life business have been volatile, "so the sale will reduce earnings volatility at the group level, said Richard Coles, senior analyst at Sydney-based Morgans Financial Ltd. Life insurance profit after tax from the business was A$34 million in fiscal 2017 and A$68 million in fiscal 2016.

But although it is selling the Australian life insurance arm, Suncorp will keep its New Zealand life operations.

"The New Zealand market is very different," CEO Cameron said during the earnings call. "We have a very robust [life insurance] business there and it generates great outcomes for our customers. It delivered a very solid ROE from shareholders' perspective and works quite well."

TAL has been owned by Dai-ichi Life since 2011 and was the biggest life insurer in terms of risk premium inflows with a market share of 17.5% in 2017, according to research company Strategic Insight. Suncorp's life business ranked eighth with a market share of 5.0%.

Suncorp's exit from Australian life is the latest in a series of such transactions, including Zurich Insurance Group AG's purchase of OnePath Life Ltd. from Australia & New Zealand Banking Group Ltd. in December 2017 and AIA Group Ltd.'s acquisition of Colonial Mutual Life Assurance Society Ltd., or CommInsure, from Commonwealth Bank of Australia in September 2017.

Another Japanese insurer, Nippon Life Insurance Co., completed an 80% stake purchase in Sydney-based life insurer MLC Ltd. from National Australia Bank Ltd. in October 2016.

Coles said the A$725 million price tag is "probably lower" than what it should look like. The Suncorp sale is being carried out at around 0.7x embedded value, while OnePath Life and CommInsure were sold at 1.0x and 1.1x embedded value, respectively, according to company disclosures.

But Coles said the price was "broadly around what the market was expecting" because the Suncorp business offers lower returns than previously sold Australian life insurers.

"Historically, the profitability [of Suncorp's Australian life insurance business] hasn't been good," said T.S. Lim, senior analyst at Sydney-based Bell Potter Securities Ltd.

Lim added that Suncorp's distribution network that can be accessed by TAL is also small, while ANZ and CBA offer Zurich and AIA, respectively, broader distribution channels through bancassurance agreements.