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Life insurance outlook dims for AMP

The earnings update provided by insurer and wealth manager AMP (ASX: AMP) on 24 June cast a shadow not only over AMP’s wealth protection business but also over the whole life insurance sector. AMP announced that it had experienced losses of $32 million during the first five months of calendar year 2013. The losses comprised $26 million in insurance claims, $8 million in lapses and were offset by $2 million in ‘other positive experience’. Of the claims experience losses, around 50% were income protection.

Perhaps of greater consequence than the actual stated losses for the five months was AMP’s outlook statement that “the industry is experiencing increased pressure on insurance claims and policy lapses”. AMP’s view doesn’t bode well for the rest of the industry either and has been backed up in comments made by Mr Jim Minto, the CEO of Australia’s second biggest life insurer TAL, in an exclusive interview with the Australian Financial Review. In Minto’s interview he echoed the sentiments of AMP, describing the domestic life insurance sector as facing a “perfect storm” due to “worsening claims and customers cancelling their cover.” He also highlighted the increasing frugality of clients who are pushing for cheaper cover.

While Minto’s comments don’t appear to have hampered AMP’s share price on Thursday, with the shares climbing over 1.7% on a day when the broader S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) was up 1%, they are still down around 10% from before the downgrade.

No doubt all eyes will be on Suncorp (ASX: SUN) and its life insurance division when it reports its upcoming results. In 2012 the life division contributed around 35% to profits of the group making the division the second largest profit driver after the general insurance division. Banks including Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac (ASX: WBC) also have significant life insurance operations; however as a percentage of overall earnings their insurance divisions have less of an impact.

Foolish takeaway

The insurance sector is cyclical and fluctuates between hard pricing and soft pricing. It appears the life insurance sector is currently moving into a softer pricing environment which could offer a good entry point to investors who take a through the cycle view of the sector.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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