Westpac has a tough sell with life insurance unit

Westpac’s Jason Yetton is spearheading the divestment process as head of specialist businesses and strategy. Picture: Hollie Adams

Being late to the party, Westpac confronts a tough task to offload its life insurance division as the process reaches the pointy end this month.

This column understands potential acquirers will lob final bids in the second half of June, in a process that is being run by a depleted JPMorgan.

Complicating matters is that the other three major banks have already exited life insurance, meaning Westpac – as the last one to sell – is dealing with a reduced bidder universe.

Life insurance sales mired the big banks in controversy at the Hayne royal commission and that, coupled with hefty amounts of capital required and increased regulatory scrutiny, saw most head for the exits.

Westpac’s life insurance arm wasn’t immune from controversy and the division is on the auction block, alongside a broad set of businesses that are being sold. They include auto loans, investment platforms and superannuation.

The units being sold were ploughed into one area of the bank that is being overseen by executive Jason Yetton, who is largely tasked with finding the right exit strategy.

Westpac’s total in-force life insurance premiums fell to $943m in the six months ended March 31, from $1.2bn in the same period a year earlier. But policy lapse rates were improved in the latest half at a negative $67m from $71m.

The accounts showed that life insurance premium income printed at $529m in the March half, a drop of 23 per cent on the year earlier period.

Westpac’s latest accounts also refer to a class action against the bank and its life insurance arm, for which parties reached a settlement last month. That settlement – where the bank did not admit liability – was capped at $30m and related to policies sold between 2011 and 2017. It requires Federal Court approval.

Shine Lawyers drove the class action as it alleged Westpac overcharged more than 100,000 customers because its own financial advisers purposefully directed them to more expensive life insurance products.

In the running for the Westpac life insurance business are said to be TAL, owned by Japan’s ­Daiichi, while Resolution Life is also around the hoop but the firm’s level of interest is being questioned. Both potential buyers are known to drive hard on price, and thought also has to be given to how a multi-decade life insurance distribution deal with Westpac is handled.

TAL also has a secret weapon within its ranks in chief financial officer David Lees.

Before joining TAL in February last year, Lees was Westpac’s deputy chief executive spanning the bank’s financial, accounting and reporting matters.

TAL snapped up Suncorp’s life insurance unit two years ago and negotiated hard on that transaction.

The deal included a 20-year strategic alliance for the sale of life insurance products through Suncorp’s distribution network.

Resolution – which acquired AMP’s life insurance operations in a deal completed last year – targets life insurance books and manages existing customers and the run-off, rather than writing new business.

Large life insurance transactions also require the prudential regulator’s sign-off and tend to have a protracted completion period, given the size and complexity of what’s involved.

Westpac boss Peter King and Yetton certainly have their work cut out in executing the life insurance sale, given the limited pool of buyers and the fact the division has informally been on the market for 18 months or so.

The real argy-bargy happens after final bids are in and TAL and Resolution will be tough negotiators.

Investors may be wondering whether Westpac would be prepared to walk away from a sale if it can’t attract the right price? Or will the bank just forge ahead anyway and draw a line in the sand under its life insurance foray.

The other major banks will be breathing a sigh of relief around the timing of their retreats.

ANZ ruled off a life insurance sale to Zurich and Commonwealth Bank offloaded its operations in Australia and New Zealand to AIA.

National Australia Bank got in first in 2015 when it divested an 80 per cent stake in MLC life to Japan’s Nippon.

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IPO watch

The marketing spiel for life insurance group NobleOak’s ASX listing got underway on Thursday, with broker Barrenjoey talking up market share gains in direct and adviser channels and strong growth prospects.

The Australian revealed on Wednesday that NobleOak was ramping up its float plans with analyst research and fund manager meetings.

Barrenjoey released an in-depth report on NobleOak and the sector on Thursday. It expects the company to increase net profit by 26 per cent in fiscal 2021 and by 49 per cent the following year.

The research cited ClearView Wealth as the closest local comparable stock by market and growth prospects. ClearView trades on a price-to-earnings metric of 14.8 times expected 2021 earnings and 10.9 times 2022 earnings, it said.

The median PE ratio of a group of nine listed companies – including ClearView and overseas listed AIA and Swiss Life – was 11.4 times for 2022.

The report noted NobleOak’s net profit margin over net premium was expected to be 16.1 per cent in fiscal 2022.

But it cautioned of risks to ­NobleOak including those from regulation and reinsurance, and that policy lapse rates could rise.

Barrenjoey also highlighted the wave of rationalisation that has occurred in the life insurance sector over the past decade and said there was still an underinsurance issue in Australia. That’s in some respects due to the industry’s tarnished reputation.