Will 2019 spell the death of ASX life insurance returns?

The Challenger Limited (ASX: CGF) share price has been in freefall this morning. Is this an ominous warning for the life insurance sector in 2019?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Challenger Limited (ASX: CGF) share price has been in freefall this morning, plunging 12.78% to $8.05 per share in early trade as the company announced a 97% decrease in first-half profit.

The diversified financials group is expecting to report net profit after tax (NPAT) of just $6 million in 1H19, down from $195 million in 1H18, following significant losses in both their equity and fixed income allocations. Whilst Challenger has been hammered this morning, and rightly so, my view is that this is an ominous warning for the life insurance sector in 2019.

Challenger announced a yield on its life insurance business of just 1.3% for the first half of the year as profitability wanes and headwinds continue to build across the sector. Life insurance was dragged through the mud in the Financial Services Royal Commission last year as the inquiry exposed some less-than-savoury practices and I expect the fallout from the February 1 report to be damning for individual insurers and the sector as a whole.

The response from the banks, many of which own the large life insurance providers in Australia, has been to sell-off these interests before Commissioner Kenneth Hayne could tell them to do so.

The mass exodus from the sector has seen the likes of Suncorp Group Ltd (ASX: SUN), AMP Limited (ASX: AMP) and Australia and New Zealand Banking Group (ASX: ANZ) try to divest their life insurance divisions for sums of $600-800 million throughout 2018. Whilst gross revenues in the sector should continue to rise on the back of ever-increasing superannuation policies, the domestic headwinds are making me steer clear of the sector for the time being.

Foolish takeaway

I believe life insurance is in a similar boat to that of aged care in Australia. Whilst the fundamentals should be supportive for the sector, with an ageing population providing strong structural support for Australia's insurers, the high costs of compliance and remediation in the short-term is enough to make me wary of investing at this stage in the cycle.

I would prefer to channel my funds towards the information technology sector such as Afterpay Touch Group Ltd (ASX: APT) or Appen Ltd (ASX: APX) until the dust has settled on the Financial Services Royal Commission.

Motley Fool contributor Lachlan Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and Appen Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Share Gainers

These were the best-performing ASX 200 shares in March

These shares made their shareholders smile in March thanks to some very big gains.

Read more »

Businessman using a digital tablet with a graphical chart, symbolising the stock market.
Opinions

2 ASX shares I have been buying in 2024!

I’m a believer in the long-term outlook of these stocks.

Read more »

Stock market chart in green with a rising arrow symbolising a rising share price.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a massive day for the ASX 200, with a new all-time high recorded.

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Technology Shares

This ASX tech stock rocketed 60% in March! Can it keep on delivering?

After soaring in March, the ASX tech stock is now up 169% since this time last year.

Read more »

Broker Notes

Brokers name 3 ASX shares to buy now

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
Share Fallers

Why Burgundy Diamond Mines, Clarity Pharmaceuticals, EML, and Zip are sinking today

These ASX shares are ending the week in the red. But why?

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Share Gainers

Why Mesoblast, Newmont, Pilbara Minerals, and Platinum shares are jumping

These ASX shares are ending the week strongly. But why?

Read more »

a young boy dressed up in a business suit and tie has a cute grin and holds two fingers up.
Opinions

2 of my top ASX 200 shares to consider buying before April

I would happily exchange dollars for these two shares right now.

Read more »