CBA offloads life business

Commonwealth Bank (CBA) has announced the sale of its life insurance business in Australia and New Zealand for $3.8bn to AIA Group, the Hong-Kong-based pan-Asian life insurance group. As part of the deal, CBA will also enter a 20-year partnership with AIA, under which it will distribute AIA's products in Australia and New Zealand. The deal is expected to complete in calendar 2018, after various regulatory and other conditions have been met, and CBA will keep its general insurance businesses.

The price of $3.8bn looks fair, at about 1.7 times net tangible assets, 1.1 times embedded value and 16.9 earnings. CBA will be giving up $224m – about 2% – of its annual profit, or about 13 cents per share. But it will get an extra 0.7% of common equity tier 1 (CET1) capital, which will push its CET1 ratio up from 10.1% at the end of June to 10.8%, past the 10.5% required by APRA by 2020.

The global life insurance business has been consolidating in recent years in what is increasingly a scale business. What CBA does offer is distribution to its huge retail customer base. So it makes good sense for CBA to pass on the ownership of its life business to AIA – the world's second-largest life insurer by market capitalisation – while it sticks to distributing the products.

In a separate announcement, CBA said it was looking at options to sell its asset management business, Colonial First State Global Asset Management (CFSGAM), including in a stockmarket float. The arguments here are that there's little synergy between asset management and banking and that CFSGAM might be better able to develop its business on its own. These arguments are less powerful than for life insurance, but we don't disagree.

CBA is down 5% since we reviewed its final result last month. However, it is up 5% since a couple of weeks ago as the concerns about the AUSTRAC investigation have abated somewhat, helped by the successful issue of US$3bn of bonds in the US at a lower premium to US treasuries than expected. HOLD.

*Please note our recommended maximum portfolio weightings of 10% for CBA individually and 20% for the banking sector as a whole. More conservative investors and those with other exposure to the property market should use lower limits.

Note: The Intelligent Investor Equity Income Portfolio owns shares in CBA. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.