By Tom Westbrook and Daniel Leussink
SYDNEY/TOKYO (Reuters) - Australia's Suncorp Group is selling its life insurance division to Dai-ichi Life Holdings for $540 million, making the Japanese firm Australia's biggest in a sector that domestic companies are scrambling to quit.
Suncorp shares hit a 10-year high on Thursday as investors cheered the A$725 million ($540 million) sale, even though Australia's second-biggest insurer will book an A$880 million non-cash loss, as it will exit a bumpy business where rising claim rates and a slew of scandals have heaped pressure on earnings.
Insurers from Japan, where the domestic market is shrinking, already have a significant presence in Australia's life insurance sector. Dai-ichi itself spent A$1.2 billion in 2011 to buy out Australia's then No.2 life insurer TAL.
"It's diversification and it enhances their risk distribution," said Rohan Walsh, director of Melbourne-based fund manager Karara Capital, referring to Dai-ichi's motivation for the deal.
"For domestic investors it's been a fairly volatile area of business so I think best to concentrate the business and liberate capital - it's a positive," he added.
Australia is an attractive market for foreign insurers because the population and economy are growing faster than in most other developed markets, and analysts expect industry revenues could turn a corner after a choppy few years.
Big foreign insurers control just over a third of Australia's fragmented life insurance industry, data from research firm IBISWorld shows. With the purchase of Suncorp's life business, the Japanese firm will claim top spot by market share, the data shows.
"We consider Australia a market where we want to continue growing further as its economy is growing at a steady pace and it is a developed market," a Dai-ichi spokeswoman said.
Suncorp's sale is the latest in a list of life insurance divestments by Australian firms as media reports of hard-sell sales tactics and claim refusals drove policy cancellations and brought increased regulation, just as bank capital requirements tightened.
Nippon Life Insurance Co bought most of Australia's No. 3 life insurer, National Australia Bank's MLC unit, in 2015.
Zurich Insurance Group AG and Hong Kong-based AIA Group Ltd also spent billions buying local operations from ANZ Bank and Commonwealth Bank respectively.
"Our life divestment will further lighten our capital demands and reduce volatility," Suncorp Chief Financial Officer Steve Johnston said on a conference call.
Dai-ichi said in a statement its purchase price for Suncorp's business was A$640 million, plus "adjusted net worth on completion".
Suncorp's annual net profit edged lower to A$1.06 billion as a regulatory crackdown raised costs, though the performance was expected and was a rebound from the first half when a hailstorm sent claims spiking.
Its yearly revenue dropped 11.2 percent to A$15.45 billion, as reinsurance income fell. The firm expects both growth and cash return-on-equity to improve in the 2018-19 financial year.
Suncorp shares jumped as much as 6.4 percent to A$15.95, their highest since 2008, as the broader market rose. Dai-ichi shares were down 0.6 percent in a broader Japanese market that was down 0.2 percent.
"Targets for FY19 look encouraging, implying small positive consensus earnings revisions," said John Lockton, Head of Investment Strategy at advisory firm Wilsons.
Suncorp will pay a final dividend of 40 Australian cents per share and a special dividend of 8 cents per share.
($1 = 1.3461 Australian dollars)
(Reporting by Tom Westbrook and Paulina Duran in Sydney and Aditya Soni in Bengaluru; Editing by Chris Reese and Muralikumar Anantharaman)
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