Investor briefing gives insight into economy

Last week, leaders of seven listed diversified financial services companies gathered in a conference room high above Sydney's Farrer Place to discuss their prospects with institutional investors.

Last week, leaders of seven listed diversified financial services companies gathered in a conference room high above Sydney's Farrer Place to discuss their prospects with institutional investors.

What followed offered a unique opportunity to gauge the health of the Australian economy and, in particular, its once all-conquering financial services sector.

As John Lombard, the chief executive of the country's biggest listed accountancy network, WHK Group, said, Australia's financial services industry was facing what might be a perfect storm: volatile markets and a wave of new regulation.

Predictably, conditions in parts of Western Australia and Queensland were strong but confidence was low in the most populous states of Victoria and NSW. Any region exposed to tourism was "terrible".

One CEO said national business confidence was as low as it was in the early 1990s when unemployment peaked at 11.3 per cent and interest rates reached 18 per cent.

January and February may have performed to budget but March and April were tough months (should we be blaming events in Canberra?).

The chief executive of regional banking group Mystate, John Gilbert, said the nicest thing that could be said about the Tasmanian economy was it was not growing. Unemployment was 7.7 per cent and there was no obvious catalyst for a rebound.

The head of wealth management play Plan B, Andrew Black, noted fund flows into financial services firms were more likely to be from competitors than clients taking a more aggressive attitude towards risk.

All this means listed financial stocks are trading at record or near-record low forward earnings multiples.

The chief financial officer of life insurer ClearView, Athol Chiert, said shareholders were effectively being offered a free-option on growth, given the value of business already on the books.

The CFO of IOOF, David Coulter, said the tough conditions meant there were consolidation opportunities on offer for stronger companies. IOOF has no net debt and an enviable track record in mergers and acquisitions. Further deals could take place, for instance in distribution

Despite the gloom, there are pockets of growing organic demand.

The insurers, whether it be life insurance, health insurance or general insurance, are proving their resilience.

According to ClearView Wealth, the industry wide sale of life insurance products continues to move along at low double-digit levels.

The health insurer NIB points out it is inevitable that individuals will have to take greater responsibility for their health as governments are unable to maintain the current level of support.

A change of government could accelerate this trend.

The federal government is already spending 4 per cent of gross domestic product on health. This is expected to double as a proportion of gross domestic product by 2050.

Then there is the growing propensity towards discretionary spending on health. For instance: I am going to get my knee done to keep my (illusory) AFL dream alive.

After a string of natural catastrophes, general insurance minnow Calliden reports average annual home premiums have risen from $420 to $810 over the past four years. Further increases are planned for next month.

Despite this, policy retention remains high among home insurance customers. It seems that in tough economic times home owners are reluctant to relinquish their insurance.

No surprise then that Suncorp reported yesterday that its general insurance business had improved ahead of expectations in the second half of its financial year.

The general insurers from IAG and Suncorp through to Calliden are going to make money if conditions remain benign, even taking skyrocketing reinsurance costs into account.

Stewart Oldfield is an analyst at Investorfirst Securities.

soldfield@investorfirst.com.au

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