Westpac gets lift with $725m insurance business sale to Allianz

Westpac’s simplification program under new chief executive Peter King has accelerated with the $725m sale of its general insurance arm to Allianz.

The sale price in the Allianz deal represented a multiple of 1.3 times gross written premium in the 2020 financial year. Picture: David Geraghty/The Australian

Westpac’s simplification program under new chief executive Peter King has accelerated with the $725m sale of its general ­insurance business to Allianz.

The transaction, which originated in the bank’s specialist business arm led by Jason Yetton, was complemented by an exclusive, 20-year agreement for the distribution of general insurance products to Westpac’s customers. The sale was foreshadowed by The Australian’s DataRoom column on Tuesday.

Mr King said the deal ­represented a significant milestone in his bid to build a simpler, stronger bank.

“This transaction is another step in simplifying our business while continuing to help customers with their general insurance needs,” he said.

“General insurance products are important for many Australians and we are pleased to be ­entering a long-term partnership with a global insurance expert to continue to help customers protect the things they value.”

With the group’s profitability and dividends under significant pressure, and a lot of regulatory, compliance and digital investment to undertake to catch up to its rivals, the transaction will provide a welcome boost to the group’s common equity tier one capital ratio.

The ratio, which ended the September financial year at 11.13 per cent, up 32 basis points from the half-year, will improve a further 12 basis points.

The bank’s CET1 ratio came under pressure after Westpac agreed to pay a $1.3bn penalty to financial crime agency Austrac over multiple breaches of anti-money laundering legislation.

As part of efforts to offset the impact, Westpac also announced the $367m sale last month of its 10.7 per cent stake in the credit card disrupter Zip Co. That transaction added eight basis points to Westpac’s capital ratio.

The sale price in the Allianz deal, which was foreshadowed in The Australian on Tuesday, represented a multiple of 1.3 times gross written premium in the 2020 financial year.

Westpac is likely to yield a small after-tax gain once the transaction is completed in 2021.

The bank said in a statement to the Australian Securities Exchange that the deal also included contingent payments which were subject to integration milestones and business performance over the next five years. There were also ongoing payments related to the distribution agreement.

The new distribution arrangement expands Westpac’s existing partnership with Allianz, which has seen the bank distribute a range of Allianz products to customers, including automotive, travel, boat and business insurance since 2015.

Westpac, however, continues to attract the wrath of ­financial regulators after its ­Austrac entanglement.

On Tuesday, the Australian Prudential Regulation Authority hit Westpac with enforcement action over “material breaches” of its prudential standard on liquidity, which were identified in 2019 and 2020.

APRA said the breaches related to incorrect treatment of funding and loan products for calculating the bank’s liquidity coverage ratio and its net stable funding ratio.

As a result, Westpac will have to comply with a more onerous and expensive calculation of its liquidity coverage ratio.

While the regulator said the breaches had been rectified, and did not raise concerns about the overall soundness of Westpac’s current liquidity position, they demonstrated weaknesses in risk management and oversight.

Separately, Westpac also said on Tuesday that it expected to enter into an enforceable undertaking with APRA over risk remediation in the wake of the Austrac debacle.

APRA said its review had found an “immature and reactive risk culture, unclear accountabilities” and other issues.

Mr King said the bank acknowledged the findings of the review and accepted that it needed to “work faster and address our shortcomings”.

The findings were consistent with Westpac’s own culture, governance and accountability report, which was released in July.

Westpac will retain responsibility for certain matters prior to completion of the Allianz deal, which is expected to occur in the second half of calendar 2021 after various regulatory approvals are obtained.

The bank will provide protection to Allianz through a combination of provisions, warranties and indemnities.