NZ life insurers carved out annual net profits of almost $500 million, according to an analysis of the latest financial data on the sector.
The Auckland-based firm Chatswood Consulting research shows total life insurer profits were up 6.3 per cent over 2017/18 compared to the previous annual period.
“This translated to a return on net assets ratio of 11.2% for the industry as a whole,” the Chatswood study says.
However, the research highlights a wide disparity in both profits and growth trajectories of the 17 insurers captured by the data.
Net profits ranged from an almost $13.2 million loss for the Southern Cross health insurance business to a whopping $149 million return for AMP Life. Co-operative Life garnered the highest return on assets (about 34 per cent) with Southern Cross reporting a -3.1 per cent result by this metric – the only insurer in the Chatswood study to fall into the red zone.
Since the financial reporting periods covered in the study, three insurers – AMP Life, ASB subsidiary Sovereign, and the ANZ-owned OnePath – were sold to Resolution Life, AIA and Cigna Life, respectively.
Russell Hutchinson, Chatswood founder, said the seemingly outstanding AMP result masked some underlying stresses in the group’s business. AMP reported the highest gross ($259 million) and net revenue ($149 million), compared to respective results of $151 million and $101 million for the second-most profitable group, Sovereign.
“AMP Life accounts are complicated by the recent transaction (pre-sale to Resolution) to merge in Axa’s accounts,” Hutchinson said. (AMP bought Axa’s Australasian life and investment assets in 2011).
“Prior to that, however, net premium income had been falling. So AMP appears to have been a business with excellent financial performance, but shrinking. This is a formula which rarely results in stellar valuations.”
AMP also had the highest ‘net loss ratio’ (which measures claims expenses as a proportion of premium revenue) of all NZ life firms after selling most of its book to reinsurers a couple of years ago, he said.
Both AMP and Sovereign saw a respectable, if not spectacular, return on net assets (18.7 and 14.1 per cent, respectively) while, the third now-sold NZ life insurer, OnePath, reported just 5.5 per cent by the same measure.
“Contrast this with, say, AIA, or Partners Life,” Hutchinson said. “Both companies show worse financial performance, but much better growth, which financial markets actually prefer, to companies managed to very short-term financial objectives.”
The NZ life insurance sector is due for a shake-up under both the Financial Services Legislation Amendment Bill (FSLAB) and a review of the Insurance Contracts Act. Following a highly-critical industry report published by the Financial Markets Authority (FMA) and Reserve Bank of NZ (RBNZ) this January, NZ life insurers also have until June to adjust their incentive structures.
During the final house committee debate on FSLAB earlier this Month, Commerce Minister Kris Faafoi confirmed the government would move to ban so-called ‘soft commissions’ such as free overseas trips for advisers.
“… but also we said that we’d consult with the sector and look very closely at the other commission structures, many of them that may be within the financial advice sector, to make sure that any changes to commissions are done in a balanced way and also look at ensuring that any, kind of, outcomes that aren’t in favour of a good outcome for consumers are dealt with,” Faafoi said during the FSLAB debate. “But we don’t necessarily need to throw the baby out with the bathwater.”
He said the Ministry of Business, Innovation and Employment was preparing advice on the issue for the government ahead of wider consultation slated for May “to make sure that we get the balance right with the industry on commissions as well”.
FSLAB missed its slot to pass into law in March, delayed by the government response to the Christchurch atrocity.