How ominous are the clouds hanging over the country’s life insurers?
Investors were given a rude shock this week when
One of the key problems for the life insurance industry is that some players under-priced their risks in a bid to win group life cover contracts from the country’s big superannuation funds. The combination of cheap rates and automatic cover for all super fund members resulted in sizeable losses.
Even worse, in the wake of the cap on workers’ compensation claims, many lawyers are encouraging clients to look at their life policies to see whether they can claim – particularly when it comes to stress-related illness.
At the same time, the jump in unemployment – the country’s jobless rate is about 6 per cent – has led to a spike in income protection claims.
And financial advisers, who earn hefty upfront commissions on life insurance policies they sell, are moving clients from one insurer to another to boost their earnings.
The life industry’s woes are clearly evident in the figures compiled by the Australian Prudential Regulation Authority, which show profits across the industry in all categories plunged 35 per cent to $1.9 billion in the year to March on revenue of $42.5 billion.
But some investors believe the worst is over, and that there is potential for steep share price rises for some life companies as the industry takes steps to stem its losses. They argue life companies are increasing the price of death and disability insurance to more realistic levels.
What’s more, the life companies are pushing to change remuneration of independent financial advisers so that they earn a trailing commission rather than a large, upfront one.
Glimmer of hope
The bulls argue that, just as general insurers such as Suncorp and
If the bulls are right, this could be good news for Australia’s biggest life insurer,
But other analysts remain cautious. Commenting on AMP’s first-quarter cash flows, Deutsche Bank analyst Kieren Chidgey (who has a “hold" rating on the stock) says claims and lapse activity in the three months “was broadly in line with new rebased assumptions". But he notes the first quarter “is typically a benign period for both claims (income protection and disability) and lapses, given the holiday season in January". So he says it’s still too early to say whether AMP’s revised risk outlook will be enough.
Although market turbulence means AMP’s wealth management business grew at a slower rate in the first quarter, he says the update “provided greater reassurance that retail wealth fund flows continue to improve and that risk insurance claims and lapse activity has not deteriorated further". But with AMP already trading at 15.2 times its forward earnings, in line with its long-term historical average, Chidgey sees “limited value upside".
Similarly, UBS analysts (who have a “neutral" rating on AMP) say AMP’s wealth protection business in the first quarter is “no better, no worse". They believe the division is on track to see net inflows of $2.9 billion this year.
“The slow but steady recovery that started last year appears to have continued, with consistent trends across products. Importantly, no new first-quarter 2014 surprises emerged in wealth protection."
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The Australian Financial Review