Australia's life sector saw a 65% drop in net profit for the first quarter ended 31 March to A$0.8bn ($0.55bn) compared to A$2.2bn in the previous year.
The deterioration was primarily caused by a material discrete write-off of goodwill and the poor performance of risk business, particularly individual lump sum and individual group disability income insurance (DII), as revealed by the quarterly life insurance performance statistics published by Australian Prudential Regulation Authority (APRA).
Risk products reported an after-tax loss of $94m for in the first quarter of this year and individual DII posted an A$219m loss for same time period. This was attributed to loss recognition caused by a persistent adverse claims experience and a significant reduction in discount rates.
The sustainability of individual DII has been a cause of worry for APRA who issued a series of requirements for life companies to address concerns in a letter to the industry earlier this month.
Due to the ongoing poor performance of individual DII, APRA had been concerned about it being sold to individuals rather than being provided through superannuation in the form of group insurance. The industry has collectively lost A$2.5bn through this product offering over the past five years, with no signs of improvement.
Despite being battered by losses, the industry saw a A$536m total entity net profit for the March 2019 quarter, marking a significant improvement from its A$529m loss for the previous quarter. The improvement came about due to favourable movements in financial markets during the most recent quarter (e.g. a 9.5% rise in ASX 200), which positively impacted life insurers’ investment revenue, along with a discrete write-off of goodwill that negatively affected the results of the preceding quarter.
At the same time, the return on net assets was 3% which was a 5.6% decrease from the previous 12 months. The industry PCA coverage ratio also decreased from 1.87x to 1.79x over the same period, as the prescribed capital amount increased by more than the capital base. The five-year average coverage ratio is 1.83x.