Tougher times mean bigger bucks for insurers

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 those present a gauge of the health of the Australian economy, in particular its once all-conquering financial-services sector.

As John Lombard, chief executive of the country's biggest listed accountancy network, says, these days Australia's financial-services industry is facing what might be described as a perfect storm: volatile markets and a wave of new regulation.

Predictably, conditions in parts of Western Australia and Queensland are strong but confidence is low in the most populous states of Victoria and New South Wales. Any region exposed to tourism is "terrible".

One CEO said national business confidence was as low as it was back 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?).

John Gilbert, CEO of regional banking group MyState Limited, said the nicest thing that could be said about the Tasmanian economy was that it was not growing. Unemployment stands at 7.7 per cent.

Andrew Black, CEO of wealth-management firm Plan B, noted that fund flows into financial-services firms were more likely to be coming from competitors rather than clients taking a more aggressive attitude towards risk.

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

Athol Chiert, chief financial officer of life insurer ClearView, said shareholders were effectively being offered a free option on growth given the value of business on their books. David Coulter, CFO of IOOF, said the tough conditions meant plenty of consolidation opportunities for stronger players. IOOF has no net debt and an enviable record in mergers and acquisitions.

Despite the gloom, there are pockets of growing organic demand. The insurers, whether it be life, health or general insurance, are proving their resilience. According to ClearView Wealth, the industry-wide sale of life-insurance products continues to truck along at low double-digit levels.

Health insurer NIB points out 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 government is already forking out 4 per cent of gross domestic product on health and this is expected to double as a proportion of GDP by 2050.

After a string of natural catastrophes, general-insurance minnow Calliden reports that average annual home premiums have risen from $420 to $810 in 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, mums and dads are reluctant to relinquish their insurance. No surprise, then, that Suncorp yesterday reported its general-insurance business had improved beyond expectations in the second half of its financial year.

The general insurers are going to make money if conditions remain benign, even when taking skyrocketing reinsurance costs into account.

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