AMP well-positioned for insurance tax changes
AMP has posted a solid result for the six-months to June 30, as it prepares for the change in life insurance taxation rules next year. Managing director warns there is pressure ahead, especially in the distribution space.
Friday, August 22nd 2014, 7:11AM
AMP Financial Services has reported a five percent lift in operating earnings for the six months ending June 30 June. The $59.4 million result has been driven by increasing profit margins.
Profit margins for the period were $60 million; up 8% compared to the same period last year. This margin growth was primarily driven by a reduction in controllable costs and an increase in assets under management.
AMP New Zealand managing director Jack Regan describes its as a "solid but not stellar" result, even though profit margins were up by 8%.
Over the years AMP has been very good at taking cost out of the business.
Controllable costs for the six-month period fell from $53 million to $45 million
Regan says in 2008 AMP’s cost to income ratio was 47%, and this has now fallen to 31.6%.
“(This) is further evidence of the journey the business has been on to reduce costs and improve revenue,” he says.
Regan says there is still more to that can be done here, especially with the roll out of digital tools. He says there is still some rationalisation in the wealth management area as there are still AXA and AMP products.
However, he acknowledges the cost cutting can’t continue forever.
Part of the reason for getting the cost to income ratio down is to help the company when the transitional tax relief on life insurance products finishes next year.
“We want to be as efficient as we can be to take pressure off price increases.”
He says part of AMP’s strategy is to get its costs under control, grow its businesses, especially in other areas. One of these is KiwiSaver.
This was described in the results as being the key driver of its wealth management business.
Regan believes AMP is well placed when the tax relief comes off. He says the industry expects to pay an additional $100 million in tax when the new rules come in. For AMP that is likely to be a bill of $20 million a year.
“It could be more,” he says.
AMP’s analysis of the market suggests “there’s a lot of head wind for most players.”
He says this is likely to put pressure on the distribution area.
In the six-month period AMP’s annual premium income was flat at $301 million, however lapse rates rose from 11.6% to 13.3%.
Regan says the current pressure on households with rising insurance costs is clearly having an impact on consumers’ appetite to protect their personal risk.
He reiterates the problem with churn in the life insurance industry. According to FSC figures 80% of the business written is replacement business and policies written today are only likely to stay on a life company’s books for five years.
He says this is not a sustainable position.
Much of it is being driven by pricing and commission practices that aren’t sustainable.
“They are not terribly sensible or sustainable,” he says.
While AMP is partially insulated because of its distribution models it is not immune to the pressures, he says.
The Reserve Bank’s new solvency and reinsurance rules may help address churn issues, he says.
Regan questions where new business is going to come from for the life insurance industry. He partly answers that question by saying some of it form people taking out mortgages – and this is the domain of the banks. The other area is small businesses – but they are price sensitive.
However manufacturers need to have a “rational and balanced” approach to the advice proposition.
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