Fitch Ratings has warned that the planned A$500m non-cash writedown by the life assurance unit of Queensland-based financial services group Suncorp is a reflection of "cyclical and structural changes facing the wider life insurance industry".
As Reactions reported yesterday, Suncorp took a non-cash intangible asset writedown of about A$500m which it said reflected "the culmination of a detailed review of the business, taking account of current industry trends and Suncorp's more recent experience".
Goodwill and other intangibles made up A$350m of the writedown. This included part of the large goodwill amount added to the balance sheet from the A$7.9bn acquisition of Promina Group in 2007 from the then Royal & SunAlliance. The remaining A$150m came from the combined write-down of deferred acquisition costs and reserve strengthening. Both figures are after tax.
Suncorp Group chief executive Patrick Snowball said that the altered assumptions "recognised the industry headwinds and deteriorating situation". He emphasises that the changes ensured that Suncorp was valuing life assurance assets and planned margins "on more forward-looking assumptions" rather than on a historical average basis, which had hitherto been the more common system used in the life assurance sector.
Fitch today said that the Suncorp revisions were "in line with our own sector expectations". It said that part of the challenge facing the Australian life sector were cyclical in nature. These included higher costs of living and rising unemployment. However, Fitch also noted rising lapse rates. Claims were also being driven by structural, non-cyclical factors. These included agent commission structures, broad policy wordings, lawyer-driven claims and product design.
The agency warned that these issues would not be resolved in the short term and that "a new normal" of smaller profit margins should be expected to continue in the medium term. "The initial costs of acquiring new life insurance business through the independent advisor channel, which forms a significant part of Suncorp's life business, is front-loaded through large upfront commissions - a change to this commission structure will require a market consensus that is unlikely to happen quickly".
On the positive side for the sector, Fitch said that these lower profitability expectations "should not have a substantial negative impact on Australia's large financial institutional and insurance groups". The Australian life sector remained relatively profitable, with a return on net assets of 9.3% in the 12 months to end-March 2014 – down 5.8 percentage points on the previous 12 months.
Fitch added that, with respect to Suncorp, the write-down would have a negligible capital effect. The agency believes that "over the longer term the business can provide a valuable level of earnings diversity for the group".