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.
