Westpac brings in JPMorgan to sell its life insurance unit

Westpac is stepping up efforts to sell its $1.5bn-plus life insurance arm, bringing in investment bank JPMorgan.

Westpac is exploring a range of strategic options for the life division. Picture: Hollie Adams

Westpac is stepping up efforts to sell its $1.5bn-plus life insurance arm, bringing in investment bank JPMorgan to work on a potential divestment as it joins its major rivals in exiting the trouble-prone industry.

The Australian understands JPMorgan is undertaking preliminary sale work and industry meetings to lay the foundation for Westpac’s divestment.

Sources said the latest actuarial reports were being prepared ahead of any formal sale documents for Westpac’s life business, which could fetch between $1.5bn and $2bn.

US giant American International Group, MetLife and Clive Cowdery’s Resolution Life are said to be among potential suitors on JPMorgan’s radar.

Westpac is exploring a range of strategic options for the life division, including retaining it. A bank spokesman declined to comment.

But in response to The Australian foreshadowing in July that Westpac was open to selling its life insurance operation, chief executive Brian Hartzer said: “We absolutely want to continue to provide insurance to our customers. Do we ultimately need to own the manufacturing of that? I’m sort of agnostic about it.”

Any sale of Westpac’s life insurance operations would complete the big four bank retreat from the sector, following intense regulatory scrutiny and pressure on profits, partly due to policies lapsing and increased capital required to run the businesses.

The sector was thrown into the spotlight the Hayne royal commission for poor practices, including outdated medical definitions and the small proportion of claims being paid.

Three of the major banks have formed distribution alliances with the buyers of their life businesses so that customers can continue to purchase products through them.

Advisers at JPMorgan know the sector well after working on the sale of Commonwealth Bank’s life business to pan-Asian firm AIA in a $3.8bn deal.

Westpac’s head of corporate development, Adam Penny, who joined the bank last year from Bank of America Merrill Lynch, is heavily involved in the potential sale process.

“They should get out (of life insurance) while it’s still profitable,” Shaw and Partners senior analyst Brett Le Mesurier said.

“The industry has suffered from poor returns for a number of years. There is no greater example than AMP. They (Westpac) are finally taking a hint from the low profitability.”

The groundwork for a life insurance sale comes as Westpac is said to be overhauling its premium bank operations. Westpac’s website says the premium bank, which is one level below the private bank, caters for individuals with incomes in excess of $150,000 a year.

It’s understood Westpac is rationalising the number of premium customers and shifting a portion back into the mainstream branch network. Customers will be informed shortly.

The bank’s spokesman declined to comment on the restructure.

Analysts will, however, closely watch Westpac’s strategic and divestment decisions in coming months amid soft credit growth and higher capital requirements.

A sale of the life business would bolster Westpac’s core capital, known as common equity tier one (CET1), as requirements are raised by local regulators and more so in New Zealand.

Westpac’s CET1 ratio stood at 10.5 per cent as at June 30, in line with the Australian Prudential Regulation Authority’s “unquestionably strong” threshold that banks must meet by January 2020.

Westpac’s capital position has Citigroup analysts expecting a 10 per cent dividend cut when it reports earnings for the year ended September 30. The call was based on Westpac’s limited ability to “stream profits back from NZ” in the future.

New and tougher capital requirements are being formalised in NZ late this year, with the industry expecting a five-year implementation.

Westpac’s three main rivals have largely completed their exits from life insurance.

ANZ’s $2.85bn sale to Zurich was ruled off in June, while National Australia Bank got in first in 2015 when it agreed to divest an 80 per cent stake in MLC life to Nippon for $2.4bn.

CBA agreed in 2017 to sell its life insurance operations to AIA in a $3.8bn deal, but the final leg of that transaction is still awaiting completion and the price was lowered.

Westpac’s in-force life insurance premiums were $1.26bn as at March 31, down from $1.28bn a year earlier. The business also lost market share in the year ended December 31.

Life insurance services accounts show a declining return on equity for the business and an increase in total shareholders’ equity to $1.5bn for the 12 months ended September 30, 2018.

On the divestments front, Westpac has already exited its loss-making financial planning arm. It agreed to sell a small part of the unit to boutique Viridian and shut down the remainder.

The bank’s wealth division, BT, was then subsumed in the consumer and business bank, with insurance integrated into the consumer division.