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May 28 (Reuters) - (The following statement was released by the rating agency)
A planned AUD500m write-down at Suncorp’s life insurance unit reflects cyclical and structural challenges facing the wider Australian life insurance industry, says Fitch Ratings. We project weaker profitability across the sector in the next few years, but we maintain that the credit impact should be limited for the large Australian financial institutions and insurance groups - including Suncorp.
The write-down, announced on 27 May, came as part of a wider review of core assumptions following continued deterioration of operating conditions across the life sector. Owing specifically to rising claims and lapse rates, the review takes into account new expectations that a quick reversion to lower historical averages should not be expected.
The lower profit expectations for Suncorp’s life business has resulted in a AUD350m after-tax write-down of intangible assets. This included part of the large goodwill amount added to the balance sheet from the AUD7.9bn acquisition of Promina Group in 2007. This has also resulted in a post-tax loss from the combined write-down of deferred acquisition costs and reserve strengthening of AUD150m.
Suncorp’s revisions are in line with our own sector expectations. Part of the challenges facing Australian lifers are cyclical in nature - including higher costs of living related to the broader business/credit cycle, and rising unemployment. However, rising lapse rates and claims are also being driven by structural factors such as agent commission structures, broad policy wordings, lawyer-driven claims and product design.
Life insurance is a “long-tail” business, and these issues will not be resolved quickly. 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. Taken all together, a new normal of thinner profit margins should continue to be expected in the medium term.
From a credit perspective, expectations of lower profitability in the life units should not have a substantial negative impact on Australia’s large financial institution and insurance groups. The Australian life insurance sector remains relatively profitable, and recorded a return on net assets of 9.3% in the year to end-March 2014 (although lower than the 15.1% to end-March 2013).
Furthermore, with respect to Suncorp, the write-down has a negligible capital effect, and we believe that over the longer term the business can provide a valuable level of earnings diversity for the group.