Analysts have warned there are no easy fixes for troubles at AMP's life insurance business and its dividends could be reduced, after the financial services company became the latest to downgrade its half-year profit.
AMP warned payouts for its life insurance were likely to be $32 million higher than expected over the first five months this year, as it battles the impact of a slowing economy and difficulties in getting some policyholders off claims.
Many of the problems relate to income protection products which have been causing headaches for life insurers.
These products guarantee a portion of a policyholder's salary for a period of time if they are unable to work. Claims have risen rapidly in recent years as job losses rise among white-collar workers.
Meanwhile, a slowing economy has prompted some people to opt out of life insurance products such as death and disability cover.
AMP is Australia's largest life insurer and the warning pushed its shares to a 10-month low. They shed 12.9 per cent, or 64¢, to close at $4.34. The slump exceeded a 1.5 per cent decline in the broader sharemarket and left AMP's shares down almost 10 per cent through 2013. Shares in other life insurance providers, including IOOF, Challenger and Suncorp were also sold off.
Reiterating that the industry was "experiencing increased pressure on insurance claims and policy lapses", AMP told investors it expected underlying profit for the six months to June 30, 2013, of $415 million to $435 million. This was below market consensus of about $480 million and the previous corresponding result of $491 million.
It had previously warned that industry lapse rates were at a 10-year high, as more people reduced their cover or cancelled their policies. AMP said in February that operating earnings in the wealth protection business had almost halved to $56 million through the December half.
UBS analyst James Coghill said there were "no easy fixes for the structural headwind" in AMP's wealth protection division and UBS remained "cautious on the outlook".
Others, including Citi, warned AMP's dividend could come under pressure.
AMP said its other divisions were performing in line with market expectations and it had introduced "new claims management policies, earlier intervention strategies and enhanced support to help customers return to work more quickly".
Citi's Nigel Pittaway said AMP needed to become more active around its claims management processes and in some cases push through higher prices.
"These [measures] are likely to take some time to succeed," Mr Pittaway said, adding the problems could take as long as a year to resolve.
Jim Minto, the chief executive of rival life insurer TAL, recently noted a surge in disability claims and customer churning.
He said a patchy economy had prompted more disability and stress-related claims and delays in people returning to work.