Australian Insurers Say Exposure To New Zealand Quake Still Too Early To Tell
Australian insurers with exposure to the earthquake in New Zealand say it is still far too early to tell the extent of their liability to the disaster, as the calculation of costs relating to the damage caused have yet to be totalled.
Insurance Australia Group (IAG) says it has received and responded to more than 2000 calls from its customers in the aftermath of the natural disaster.
IAG says that its exposure to the 7.1 magnitude quake which rocked the city of Christchurch on Saturday will be entirely absorbed through reinsurance contracts the company undertook.
“Subject to the damage caused by the Christchurch earthquake, the loss from a subsequent major event this calendar year would be capped at a maximum of $175 million,” the company said.
IAG chief executive Officer Michael Wilkins said: “At this stage, it is too early to determine the extent of damage to our customers’ property, however we expect it is likely to be significant.”
Suncorp-Metway says its financial exposure to the Christchurch earthquake will be limited.
“While it will be some time before an accurate assessment of claims volumes and costs can be provided, Suncorp’s financial exposure is likely to be limited due to New Zealand’s statutory framework and the group’s conservative reinsurance arrangements,” said Suncorp, which operates the Vero New Zealand and AA Insurance groups in New Zealand.
Suncorp points out that the New Zealand government through the New Zealand Earthquake commission provides the first level of household cover should the country be hit by such a disaster, with cover for each house capped at NZ$100,000 per property, and a further NZ$ 20,000 for contents.
“Any household exposures beyond this and Suncorp’s commercial property risks are supported by the group’s reinsurance arrangements, which include a cap of $NZ60 million on its Vero NZ and AAI domestic earthquake exposures,” Suncorp said.
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Australian Banks Continue To Battle For Deposits By Offering High Introductory Rates
Australia’s largest banks are using high introductory online savings rates to attract retail deposits and expand their deposit bases. Despite the high introductory rates, the lenders later aggressively cut back their deposit rates in order to preserve their profit margins.
The investment bank Macquarie conducted an analysis of the online savings market which found that the big four Australian lenders, as well as some international rivals were offering introductory rates that were as much as 200 basis points higher than the 4.5 per cent official cash rate.
The study found however that those rates were aggressively cut back within four to six months, bringing them in line or just higher than benchmark interest rates.
Virgin Money currently offers the highest savings rate in the market at 6.75 per cent, followed by UBank offering 6.51 per cent, Citbank at 6.45 per cent.
Three of the majors, the CBA, NAB and Westpac, offer 6 per cent, while ANZ lags the field at 5.25 per cent. The headline rates of the majors are 129 basis points above the 90-day bank bill.
The rates which seem quite attractive to begin with are rolled back within the first three months.
According to Craig Turton, an analyst with Macquarie, lenders began the trend of raising their online rates in tandem with official interest rate hikes at the end of 2009.
“In mid 2008, when the cash rate was 3 per cent, term deposits grew much more rapidly than savings account rates because of 200 basis points difference between headline rates. The increased competition in the online market coincided with six increases in the cash rate. The cash rate increases flattened the yield curve, narrowed the difference between online savings and term-deposit headline rates and stemmed the flow to term deposits.” Mr. Turton said.
Headline term deposit rates continue to remain high, with one and three-year deposit accounts still the most expensive source of retail funding for the major banks. The one and three-year term deposit rates are up to 250 basis points above the bank bill rate.
Gail Kelly, chief executive of Westpac last week said that the lender would not engage in an online savings war with her other Big four rivals. Westpac has one of the most aggressively priced term deposits in the market.
The research from Macquarie also suggests that that the margin pressure from higher retail deposit rates would not have as large an impact as expected for the banks with greater residential lending market shares.
Previously the assumption had been that lenders which were weighted more towards institutional lending would be able to offset the costs of higher deposit rates, by raising business lending rates.
“The banks with more term-deposit funding on the liability side and mortgages on the lending side should fare better than those banks with proportionately larger institutional lending books,” he said. “The spreads on new institutional loans are now falling due to two emerging sources of competition.”Mr. Turton said
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QBE Denies Chief Executive To Step Down
Australian insurance major QBE has moved to end speculation that its chief executive is poised to step down. QBE chief Frank O’Halloran has run the company for the last twelve years, and the insurer says that he would continue in that role “for the foreseeable future”.
Rumours of Mr. O’Halloran’s departure ricocheted around the insurance industry this week, when speculation began to emerge that Mr. O’Halloran would hand over the reigns of the company to Peter Harmer, a senior executive at insurance broker AON.
Mr. Harmer’s apparent ascension was flagged in a British trade publication, Insurance Investor.
The story was quickly rebutted by new QBE Chairman Belinda Hutchinson, who branded the report as “completely false” adding that the board had still not appointed a headhunter or developed a succession plan for the 64 year old Mr. O’Halloran.
“QBE has a longstanding and successful succession planning process due to the depth of its high-quality management team. This team is ably led by Frank, who will remain the CEO for the foreseeable future. Frank has publicly stated his interest and willingness to continue as CEO.” said Ms Hutchinson.
QBE which is facing pressure from investors unimpressed by poor investment returns is thought to have received a commitment from Mr. O’Halloran for a further two years.
The Australian, which quoted an unnamed source suggested that the rumour may have started by a head hunter who was pitching their candidate. The source also added that the insurer preferred internal candidates as opposed to those from outside.
The source also questioned whether a broker was the right person to lead an insurance company, saying it was a bit like “trying to mix oil and water”.
Investors, disappointed with the most recent set of earnings, which saw poor investment returns producing a 39 per cent fall in first half profit, have also been voicing concerns over the insurers extraordinary appetite for inorganic growth through acquisition, despite the fact that QBE says that 90 per cent of its growth during the last half decade was inorganic.
Mr O’Halloran and his predecessor John Cloney have snared up to 130 acquisitions over a 25-year period, with 42 coming in the period 2005-09.
One analyst said poor investment returns were only partially to blame, and they did not tell the whole story.
“What you saw was a window into QBE when the acquisition music stops — not much top-line growth due to expansion into countries that are either deflating or not inflating, and that’s a critical issue for insurers,” he said.
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IAG Full Year Profits Slump
Australian insurance major IAG has had its bottom line severely hit by storms that have raged in Melbourne and Perth, as well as losses incurred at its UK division.
Australia’s largest general insurance company as measured by written premiums said its net profit for the year ending June 30th fell precipitously year on year. Net profit dropped from $181 million last year, to just under half, or $91 million this year, after the insurer’s UK unit generated a substantial loss, and unprecedented weather in Melbourne and Perth drove up natural peril claim costs.
IAG had previously issued guidance warning of the poor result late last month, when it said it expected its full year insurance margin, a closely watched measure of the profitability of its underwriting business was expected to fall to 7 per cent.
The insurer absorbed a pre tax charged $367 million incurred by its UK unit, after a profound rise in claims at its UK motor insurance business, in line with previous guidance.
Revenue at the insurer fell to $9.38 billion, and the company says it will pay a final dividend of 4.5 cents a share, down from 6 cents a share in the previous year, which was in line with guidance.
The insurer is now forecasting gross written premium growth of 3 to 5 per cent in the current financial, and is maintaining its guidance for insurance margin during the 2011 financial year of between 10.5 to 12.5 per cent.
“Our focus for FY11 is to build on the strong performance we have seen from our largest businesses in Australia and New Zealand and to restore profitability in the UK, while continuing to pursue growth opportunities in our chosen markets, particularly Asia,” the group’s chief executive Michael Wilkins said.
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Financial Planning Associations Rail Against Cooper Review Proposals
Financial planners are fiercely opposing the proposal by the Cooper Review, which would ban commissions on insurance in superannuation, fearing that many clients will not be able to afford a fee which is charged upfront.
The Association of Financial Advisers has levelled the accusation against many of the proposals recommended by the review, which was conducted under the leadership of former Australian Securities & Investments Commission chairman Jeremy Cooper, of threatening the income of thousands of planners, by banning the practice of commission payments on all insurance products that are part of the super, including group risk and personal risk.
“Average mums and dads in Australia, they are going to struggle with this whole idea of being charged another fee,” AFA national president Jim Taggart said yesterday.
The Financial Planning Association lent its support to the AFA argument, suggesting that many in Australia either cannot afford or will not want to pay an upfront fee, which may amount to thousands of dollars due to the length of time and effort required to establish a policy.
Mark Rantall chief executive of the FPA says the proposal runs the real risk of lower income earners not being able to afford to buy insurance.
“They would love to do it, but they have a business to run at the end of the day,” he said.
Among its 174 recommendations, the Cooper review has called for the banning of commissions on all MySuper products and on any insurance offered as part of packages.
Despite the loud chorus against the proposal, some sections of the superannuation have come out in support of a ban on commissions for insurance sales.
Sacha Vidler the chief economist at Industry SuperNetwork, a group that represents industry super funds warned that should the government fail to adopt the proposal, that there is a risk that insurance commissions could be loaded up.
“If the government bans the commissions on the super product but doesn’t ban the commissions on the life (insurance) product, one option for the providers of those products is to load up the commissions on to the life insurance,” he said.
Suncorp Seeks To Double Life Insurance Business In Three Years
Banc-assurance group Suncorp-Metway is seeking to more than double the size of its current life insurance business over the next three years, as it expands its presence in direct sale and financial planning markets.
Geoff Summerhayes, chief executive of Suncorp Life says the insurer has managed to expand its presence in the independent financial advisory market, mainly through its Asteron brand.
Whilst building the brand, the Brisbane based insurer also began building a direct distribution platform and selling general insurance under the Suncorp, APIA and GIO brands.
“Our strategy is clear, we are on track and have made excellent progress.” Mr. Summerhayes said in a speech on Wednesday.
Suncorp has embarked on a strategy of revitalising the company by positioning itself as a multi brand financial services provider that offers banking, wealth management, life and general insurance, and has specifically targeted growth in the life insurance segment.
Mr Summerhayes said the division aimed to grow in-force premium by double digits on average over the next three years while aiming also to reduce costs.
Suncorp is also seeking to improve its claims experience by largely making improvements to the process.
Mr Summerhayes said the life insurance market had exceptional potential with double digit industry growth from the current $8.1 billion of in-force premiums.
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QBE Moves To Calm Investor Nerves Over Its Exposure To BP Oil Spill
Australian insurance major QBE Insurance Group is seeking to allay investor fears over its exposure to the BP oil spill disaster, and reiterated the point that it has significant re-insurance cover, which would be more than adequate to cover large claims.
QBE’s stock price has taken a battering over the last month or so, and has lost 15 per cent since the start of April, in large part because investor fears over the size of its exposure to the disaster in the Gulf of Mexico.
On Thursday, the insurer released a statement saying that the market update it released at the end of April provided specific details on large individual risk and catastrophe claims. The update all included the maximum net exposure the insurer faces for claims on policies exposed to the oil spill.
“QBE has significant external reinsurance protection in place for claims of this nature,” it said.
QBE has faced catastrophe claims so far this year on the Gulf of Mexico oil rig loss, earthquakes in both Chile and Haiti, the Melbourne hail storm, the Icelandic volcano eruption, the earthquake in Western Australia, and some US tornadoes.
QBE said it had a $1.28 billion allowance to cover claims of this nature, including reinsurance protection of $180m for claims above $1.1bn.
Last month almost half the syndicates in the Lloyd’s of London insurance market, including QBE Underwriting, launched legal action against BP. The syndicates are attempting to block efforts by the BP to claim on cover held by Transocean.
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IAG Downgrades Insurance Margin
Australian insurance major IAG saw its shares plunge to 15 month lows and by as much as 11 per cent following the company cutting guidance on its full year insurance margin.
The company cut its insurance margin guidance for the year ending June 30th by more than 3 percentage points to between six and seven per cent, after initially announcing guidance of between 9.5 to 11 per cent.
Rising claims in its UK motor insurance business was the reason for the reduction, after the company swallowed a pre-tax charge of $365 million, which it plans on using to strengthen its claim reserve for that business.
IAG says it will also writedown a further $86 million in goodwill and other intangibles on its UK business.
IAG is an underwriter in the UK motor insurance industry, and owns the UK’s fifth largest motor insurance company, Equity Red Star.
“We do believe that this is an issue that’s peculiar to the UK. Having identified that issue we have now acted quickly, and we believe appropriately, to manage the issue and to the maximum extent we can put a cap on it.” chief executive Michael Wilkins said in a teleconference on Wednesday.
IAG says its other business remain on target to meet expectations, with the group expecting to post a margin of 10.5 to 12.5 per cent during the next financial year in 2010/11.
Chief executive of IAG’s UK division Neil Utley said there had been a rapid growth in claim farming, or “no win, no fee” services in the UK.
“This has resulted in a significant increase in the cost of smaller third party claims as well as a notable rise in the number of injured parties for each individual accident. Despite the frequency of motor claims reducing, the frequency of injury claims has increased.” he said.
Included as part of the $365 million provision is $60 million the company paid as part of a re-insurance arrangement against a further $200 million in claim impairment.
Premiums will also be increased by 10 to 20 per cent across all of IAG’s UK businesses.
Mr. Wilkins added that he did not see rates in the company’s Australian business being impacted by events in the UK, and forecast single digit rate rise during the next financial year.
“We see far more modest increases coming through in our Australian business because we are satisfied with the underlying claims performance of those businesses,” he said.
The impact of the insurer downgrading its insurance margin on dividends is still yet to be decided, and a decision would be taken after the end of the financial year. IAG says it remains committed to paying between 50 to 70 per cent of its cash earnings.
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Suncorp Outlines Cost Savings Plan
Banc-assurance company Suncorp-Metway says that it intends to improve its general insurance underlying profit margin by at least 3 per cent over the next couple of years as it seeks to simplify the structure of the business.
Group chief executive Patrick Snowball says the company has targeted $235 million in annual cost savings that can be achieved by 2013 through simplification, and a further $120 million that can be obtained through cuts in discretionary spending.
“Our move to a functional model and a single view of pricing and claims will ensure the general insurance business leverage’s scale advantages across all of its brands and unlocks the potential in functional capability that has not been realised to date,” he said.
Mr. Snowball says that the lenders simplification of pricing and claims will eliminate duplication and allow it to leverage its scale across multiple insurance brands which include AAMI, GIO and Vero..
“Our insurance business holds a clear advantage over competitors because of its scale, its industry-leading suite of brands, and the fact that we have end-to-end control of our own manufacturing, pricing and distribution channels,” he said.
Suncorp is planning on transforming personal insurance into a single pricing and claims model, shifting away from its previous strategy of maintaining a portfolio of separate businesses. Suncorp believes this will boost underlying insurance margins.
“One pricing system and one pricing team gives us a consistent view across the portfolio and minimises conflicts between brands, which will help lift yield on new and renewal policies.” Mark Milliner, head of the group’s personal insurance arm said.
The banc-assurer also plans on simplifying its commercial insurance business, and reduce the level of duplication, whilst containing expenses, and leveraging scale in its risk selection, pricing and procurement.
The group aims to boost market share, particularly in the small-to-medium enterprise.
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AXA Asia Pacific Holdings Says Open To New Bid From Jilted Suitor AMP
AXA Asia Pacific Holdings (APH), the target of an intense takeover battle between Australian banking major NAB and wealth manager AMP now says it is amenable to a new bid from jilted suitor AMP, which it would consider on its merits.
Last week, the Australian wealth manager said it had the flexibility needed to table a new bid for APH, but has yet to commit to a higher valuation than it has already put on the table.
Currently AMP values APH at $12.86 billion.
Rick Allert, chairman of APH, whilst speaking at the company’s annual general meeting on Tuesday said that any revised bid would be considered along normal lines.
“In the event that any new proposal is received from AMP, or anyone else for that matter, your independent directors will consider it on its merits subject to any legal restrictions under the current agreement with NAB and AXA SA,” Mr Allert told shareholders.
AMP’s rival for the acquisition of APH, NAB, had its higher valuation endorsed by APH’s independent board of directors, but was later rejected by the Australian Competition and Consumer Commission (ACCC) on the grounds it lessened competition grounds.
NAB says it is now considering all its options.
Mr. Allert added that he could not advise what the outcome would be, and it depended on the discussions and actions of the potential acquirers and regulators.
APH chief executive Andy Penn continued to make the point that the takeover battle had not become a distraction for the company.
“Our teams in Australia and New Zealand have been very focused on business as usual,” Mr. Penn told the meeting.
APH says it is optimistic about its future prospects, particularly due to the strength of the Asian economies, but added a note of caution, warning that economic and regulatory uncertainty continue to remain an issue.
“The outlook is very positive, however, the climate has changed in the wake of the global financial crisis and demand for regulatory change to address the perceived failings of the system has inevitably increased.” Mr. Penn said.