CBA continues simplification strategy with insurance sale

Commonwealth Bank (ASX: CBA) plans to sell its general insurance business to Hollard Group for $625 million plus deferred payments if undisclosed milestones are achieved. We agree with the strategy of investing and focusing management attention on the part of the business, lending, which underpins the bank's wide economic moat rating.

Potential consumer value-add from getting a loan and insurance in the one place is retained via a distribution agreement. The bank will enter a 15-year strategic alliance with Hollard to distribute home and motor vehicle insurance products.

Hollard appears a logical buyer given its scale and a history of partnering with well known brands. Hollard has its own brands such as Real Insurance, and is the underwriter for insurance distributed by others. These include Woolworths, Medibank, and Australia Post. Hollard serves 1.2 million customers in Australia. We believe scale is beneficial to leverage technology, claims handling, and administrative costs.

Insurance contributed less than 1 per cent of Commonwealth Bank’s cash profit in first-half fiscal 2021, and as such we make no adjustments to our earnings forecasts. We keep our fair value estimate. While the dividend yield could be temporarily boosted in the short term, a prospect that is likely attracting retail investors, shares appear overvalued.

MORE ON THIS TOPIC: Commonwealth Bank Will Still Offer Insurance and Earn a Fee, But Hollard Takes the Underwriting Risk