AMP hit by profit warning
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.
Frequently Asked Questions about this Article…
AMP warned its half-year underlying profit would be lower than market expectations after life insurance payouts were about $32 million higher than expected in the first five months of the year. The company cited a slowing economy, rising claims (especially on income protection products), and difficulties getting some policyholders off claims.
AMP shares fell sharply, dropping 12.9% to close at $4.34 — a 10-month low. The slump outpaced the broader market and left AMP shares down almost 10% through 2013, while other life insurers were also sold off.
Income protection products are a major issue: they guarantee part of a policyholder's salary if they can't work, and claims on these products have risen rapidly as job losses among white‑collar workers have increased. The slowing economy has also led some customers to reduce or cancel death and disability cover, contributing to higher lapse rates.
Analysts including Citi warned AMP's dividend could come under pressure following the profit downgrade. The article reports market concern but does not state any definite dividend cut by AMP.
AMP has introduced new claims management policies, earlier intervention strategies and enhanced support aimed at helping customers return to work more quickly. The company also said its other divisions are performing in line with expectations.
Analysts say there are no easy fixes. Citi’s Nigel Pittaway warned the measures are likely to take some time to succeed and the problems could take as long as a year to resolve, while UBS remains cautious on the outlook.
Yes. Shares in other life insurers such as IOOF, Challenger and Suncorp were also sold off after AMP's warning. TAL’s chief executive, Jim Minto, noted a surge in disability claims and customer churning, saying a patchy economy has contributed to more disability and stress‑related claims.
Investors should watch updates on AMP’s underlying profit and dividend commentary, industry lapse rates, trends in income protection and disability claims, and whether AMP’s new claims‑management measures reduce payouts. Broader economic signs that affect employment and policy cancellations are also relevant.
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