AMP chief executive Craig Meller talked to Stephen Bartholomeusz and Robert Gottliebsen about:
- The factors driving an increase in claim rates in Australia
- The impact and value of AMP’s acquisition of AXA
- AMP’s ambitions in the self-managed super fund sector
- His thoughts on the government’s proposed changes to FoFA reforms
- The financial inquiry and desired outcomes for the super industry
- The effects of Australia's ageing population on investor management
Stephen Bartholomeusz: Craig, thanks for joining us. In your results today there was, as everyone expected and you flagged, a bit of a collapse in your wealth protection business because of higher claims and lapse rates. Now, I know there’s something of an industry flavour to what’s occurring there, but can you tell us what you think is happening and whether or not you think it can be stabilised?
Craig Meller: Thanks.The challenges in a life insurance business, as you say, come from the much elevated levels of claims and lapses that have occurred over recent years. The claims are both on the group insurance side of the business and the retail side of the business.
On the group side, that’s come more from claims coming in at a much longer date after our expectations, so we’ve had to increase our reserving in that part of the business. I think that one works out by gradual industry repricing over the group life cycle, which is a three-year cycle.
On the retail side, competition over the years has gradually increased the range of benefits that people can claim. That’s caused a general increase in claims rates across the industry, together with a bit of pricing competition. I think they’re solvable. The problem is they’re not solvable in the short term and they’re going to take two or three years to work through.
Robert Gottliebsen: Craig, is there something happening in the Australian community that is part of this extra claim?
CM: I think probably the only area where there’s a more significant difference is in the approach to mental health. I think the medical profession is putting a great deal more focus on that and the quality of diagnosis is therefore much greater. Therefore, compared to the times when some of these policies were put in place, the realisation that mental health is real issues has come to the fore.
The other thing we’re seeing and something we think we can address by better rehabilitation is where people become sick or ill because of a physical illness and it gets them down mentally and the claim turns over time from a physical claim into a mental health claim. We’re putting a lot more effort into rehabilitation to get people back into the workplace much sooner because that’s good for them, that’s good for their health holistically and economically it’s good for the insurer as well.
SB: So, are you saying that there’s something of a structural change that’s occurred, Craig, as opposed to something subtle?
CM: There’s no doubt there are elements of structural change within the way people are claiming. There’s no doubt that a more aware consumer and a consumer who is more educated is going to more demonstrably demand their rights and that’s an appropriate thing too. But what that turns into is a higher percentage of your premiums end up as claims and so we’ve got to price appropriately and we’ve got to manage our business appropriately.
RG: How many years before this runs out and before you’ve repriced? These policies are often not longer than one year,
CM: On the group insurance side there’s a three-year pricing cycle, so that’ll work out over that sort of time. On the retail side, it’s less easy to define the time it’s going to take to put things right, but it’ll be a combination of improved claims management practices, much better management of lapses by the industry, working much more closely with customers to ensure that they understand the benefits they get from the insurance, making sure each year they’ve got the right level of insurance and then a gradual uptick in pricing as well. It’s going to be a multi-year solution rather than click your fingers and it’s solved.
SB: Craig, what section was the black spot in what was otherwise a pretty strong result? One thing that was interesting to me: you’ve virtually completed the integration of the AXA business. What’s your assessment of how that process has gone and I suppose the overall impact of the acquisition? Have you got everything you expected to get out of it?
CM: I think that would be the case. Firstly, if we look at the original drivers and logic of going into the AXA acquisition, we expected to get what ultimately turned out to be a $150 million dollars of synergies from the transaction and we’ve delivered those.
Secondly, there were strategic capabilities within the AXA business that we thought were very important to AMP. The two principles of those were the North platform – that’s been an outstanding success in the last year with $4 billion of net cash flows – and then broadening our distribution foothold. We’ve now got over 3,800 financial advisers through Australia. We think the strength of our competitive position as a result of the AXA merger has proven the value of it to AMP and its shareholders.
SB: You referred to the North platform and you’re right. The numbers are staggering now, the $4 billion of cash flows and $10 billion of assets under management.
SB: What happened and what are you derivative to?
CM: We spent a lot of time making sure that the North platform is absolutely fit for purpose for our clients going forwards. There’s no doubt it’s an absolutely contemporary platform and, as the financial advisers from the old AMP side have looked at it, they’ve said this is just right for our clients. It really shows you that if you get the right products and solutions and you make them available through the advice engine of AMP, that’s the sort of the delivery that you can get.
RG: In your financial services business, you’ve had a very big rise in income. Can you tell me where that has come from? Is it the sort of area that might be where the industry funds are operating, or where the retail funds like MLC and Colonial or areas like self-managed funds? Where’s that money coming from, what type of competitor?
CM: It’s been across the board in the wealth management business. There’s an awful lot more discretionary investment coming over the last year, which means people are actually taking money out of the banking system and reinvesting it into the markets and into their super.
That’s a trend that’s been mirrored across the whole of the wealth management market place. There’s a more confident consumer, a consumer who’s got more confidence in markets, coming back to the sort of business solutions that companies like AMP provide.
SB: Craig, one of Bob’s loves is a self-managed super fund sector. I noted today that you talked about your ambitions in that area and the administration side of that business. Can you tell us a little bit more about what you’re doing and what you expect to get from it?
CM: Sure. The self-managed super fund market has always been a bit of a conundrum for the big wealth players because it’s traditionally been a very fragmented marketplace. Most of the administration has been very much a cottage industry by firms of accountants throughout Australia.
What we’ve been doing over the past three years is investing in administration technology that’s really cutting edge and enables the automation of the administration capability in the same way as platforms like North automate the administration of managing superannuation or retail superannuation.
We’ve been building our capability there, both through a joint venture that we have with Super IQ, who are the original builders of the technology, but also more directly in some of the acquisitions of administration businesses that we’ve been making. So, that’s given us a real scale position.
We’ve now got about a 4 per cent share of the self-managed super market in terms of number of funds that we administer out of the whole market and we have the lion’s share of administration of these automated administration systems, which we think are the future. That is going to make us good money over time.
If the scale grows, then the unit cost of that will come down. That also means that we’re now having a dialogue with all of the trustees of these super funds and we’re looking to say what are the other products and solutions that we can provide to them.
A good example of that is our banking business now has about $200 million dollars of either mortgages or deposits that have come to us directly through the administration accounts in self-managed super funds. We see it being a primary benefit as an administrator that helps people automate their management of their SMSF. Secondly it gives us access as a product provider to those customers.
RG: All the research that we get tells us that the self-managed fund operators are very suspicious of managed funds. Not just AMP – the whole range of them. Are you encountering that?
CM: The three main asset sectors that SMSF owners invest in are cash, direct property and direct shares. The research bears out your comments. What we’re looking to on the investment side is: what are the alternative opportunities that we could bring to SMSF providers that an ordinary retail investor wouldn’t get access to? That might be the opportunity to invest in infrastructure, or invest in direct property or invest in some of the Asian funds that, as a direct retail investor, you wouldn’t get access to. So, we’re putting in place a team within AMP Capital, that will absolutely focus on building investment solutions that, if you like, will complement the core holdings of SMSF clients.
SB: Craig, one of the things that has driven the growth in that sector – and it has been impressive growth – has been the investor’s suspicion of large orders of actions like yours and your advisers. Is that going to hold you back?
There’s been the recent controversy about the proposals to amend the Future of Financial Advice reforms and bring back conflictive remuneration, remove the opt-in provision and changes to the best interest provisions. How do you feel about those proposals and do you think that they’re actually in the best interests of the sort of that you’re now attracting onto your platforms?
CM: I’ll address each of those three questions. The first is that going forwards, I think the industry is going to evolve where providing advice to clients becomes more of a partnership between the firm of accountants and the firm of financial planners.
Our best plan is we deal in the more high net worth market. They are increasingly looking and saying it’s economic for us to buy firms of accountants and then provide an holistic solution to their clients. I see as the future of the industry and AMP being the provider of the backbone of the administration system to support that as a natural position for us to play.
In terms of the FoFA changes, we were very supportive of the original FoFA legislation, which was all about increasing the quality of advice that Australians receive, but also increasing people’s access and the availability of advice.
Some of the issues with the legislation as it went through first time added an awful lot of bureaucracy to the system and made it difficult for providers to work out exactly whether something was in someone’s best interests or not. We think the policy adjustments proposed by the new government significantly reduce red tape and make it much clearer to Australians and their advisers that the advice being given is absolutely in their best interests. We’re very much supportive and in agreement with the changes that the government is proposing.
RG: Craig, AMP and Colonial and all the similar funds lost market share on a relative basis to their self-managed funds and others because their commissions were too high. Have commission rates and the way the financial planners charge for their services been substantially changed or is further work required?
CM: Within AMP, we’ve removed any commission-based remuneration arrangements for our financial advisers for investment and super products as far back as 2010. Our advisers have been operating on a fee for service basis since that time; the FOFA changes are no change to us.
One of the things I talked about today in our result was making sure that AMP is a much more customer-centric organisation. When we speak to our customers and ask them what they want from AMP, frankly a lot of them say they want to pay less. So, a lot of our work is about how we make our business much more efficient, so that we can get the pricing point right for our products and services.
To be frank, we’re delivering that. In our results, we talk about our annual margin squeeze. We’re saying that’s going to be around about 4.5 per cent per annum for the next three or four years. What other companies are going out and saying fees to customers are going down by four and a half per cent a year for the next four years.
RG: How do your costs compare with say the industry funds or MLC and Colonial and BT on the other side?
CM: Well, we think as one of the biggest players in the marketplace, we’ve got a significant advantage because of our overall cost efficiencies and organisation. I’ve been at AMP for just on 12 years now, so we started on the crusade to be as an efficient business as we could possibly be way back in 2002. We’re still on that journey.
RG: But would you think that your costs are lower than industry funds?
CM: If you talk about cost-income ratios, then we will be. An industry fund’s cost-income ratio is a 100 per cent by the mere fact that all of their costs are the total of their revenues. If I look at our capacity to price in the marketplace and be a very effective and a very efficient operator and deliver great returns to our shareholders, I’d say our cost position has got to be a significant advantage.
SB: Craig, we’ve got this financial system inquiry coming up this year and one of the obvious and major focuses of it will be the superannuation pool and how it’s deployed. What do you think might come out of that kind of discussion and inquiry, and what would you like to see come out of it?
CM: It has been fifteen or sixteen years since the original Wallis Inquiry, so I’m sure it’s about time to have a broader step back and look at the Australian financial system and say is it working effectively.
With regards to the superannuation within that system, I guess there are two key points I’d make. First, the superannuation system has been a great source of finance for the Australian economy and for Australian companies. That was no better illustrated than through the period of the GFC, where one of the components of Australia’s successful management of the GFC was the fact that Australian companies were able to recapitalise very effectively – that was superannuation money through the investment management firms that was delivering on that and providing much needed capital to many companies.
The second, and this one is also really important, is that within the superannuation laws there’s a requirement of what’s called a single purpose test: that superannuation monies must always be invested for one purpose. That purpose is to deliver the best returns for superannuants so that they can have the most prosperous retirement possible.
That’s an extraordinarily important principle that I don’t think anyone should change, so making sure that that’s maintained, whatever the system inquiry suggests more broadly, we think is critical.
SB: From that comment, do you think there might be an attempt to influence or direct where super funds are invested?
CM: There’s obviously talk around the traps around whether that becomes an issue or not. Our view is very clear: you don’t want to override the single purpose test.
RG: So, you wouldn’t be in favour of any directions as to where superannuation should be invested?
CM: No. I think it should be left up to the trustees to work out how they can best invest the superannuation funds for the best interests of the members of that fund. What that means is that as potential receivers in investment funds, you’ve got to make sure that the investment solutions that you develop – be that infrastructure assets or whatever they are – are the best possible investment vehicles for superannuants and then you can achieve that.
The Australian superannuation system has invested heavily in infrastructure assets and property around Australia and it should be able to continue. You’ve got to make sure that those potential investments are the best possible investments for the superannuation customers.
RG: We’re seeing a lot of emphasis, certainly in the self-managed funds area, on income shares. That’s why the banks are so popular and so on.
RG: Do you think that that emphasis on income longer term will affect the development of Australian companies, because they’ll pay out of more of their profits and dividends than perhaps is a good idea in terms of further development?
CM: I think it’s absolutely inevitable. If you look at the big demographic shift that’s going on in Australia, and around the world, it’s about an ageing population. If that ageing population aspires to retire, what they’re going to be looking for is income. You’re going to find more and more and more people looking for secure, income-based returns out of their retirement. Therefore the search for yield is going to become a key theme for investors going forwards and therefore the investment management sector is going to need to be looking for yield-based solutions for those customers.
RG: Does that mean that…
CM: That will be a global phenomenon and not just an Australian phenomenon.
RG: So, that means there’ll be less money for capital investment for growth?
CM: That does provide those challenges, but then when you think that an average retiree these days is retiring with probably a 20 or 30-year time horizon for their retirement, that does mean that there are going to be pools of investment that are going to be put aside to deliver strong yields in twenty or thirty years’ time.
If you’re looking at building a toll road or something like that, then it’s going to have a development phase and then a high-yield phase. That could be a critical component of a retiree’s... you know, twenty or thirty year retiree’s investment planner’s worth.
SB: Craig, much as we’d like to continue this conversation, we’ve run out of time, but can I thank you for your participation?
RG: Thank you.