Australian Life Insurance Industry Well Positioned

The Australian life insurance market is an $8 billion plus a year market in terms of annual premiums. Not only is the industry sizable in its own right, it is fast growing. In-force premiums having been growing at a double digit rate over the past decade and the outlook for the foreseeable future is for more of the same. Industry participants such as Tower Australia are looking for the industry to grow by more than 12% pa over the next 10 years, trebling the current size.

Driving this expected growth is a number of factors. Among these are still-obvious levels of under insurance. Although it is hard to be precise about the extent of this under insurance, one has to only consider their personal situation to recognise the problem of under insurance and that this problem is widespread. Under insurance will probably always be with us whether in general or life insurance, but education and astute marketing can lessen it.

Another factor is the growing level of personal debts. Since financial deregulation gathered pace in Australia during the 1980’s, the level of household debt as a percent of income has been on a steady upward trend and now stands in excess of 150% of disposable income, or triple the levels during the 1980’s. Clearly, the higher the level of debt held by a household, the greater the incentive to insure. Add to this a broader range of channels through which life insurance is now marketed as well as life insurance being commonly attached to superannuation, and the outlook for the life insurance industry remains very positive.

But what of the structure of the industry? In particular, does the structure lend itself to attractive investment opportunities? On this score, while the industry structure is not as concentrated as the banking industry, it does appear to be sufficiently concentrated to lend itself to what you could describe as rational levels of competition. In this regard, the top 5 companies control 61% of the market, while the top 10 control 93%. Further, there has been a trend for consolidation in the industry and you would expect that this trend would continue for the time being.

To confirm the rational level of competition in the industry, we can look at return metrics for individual companies, and in this regard AMP’s wealth protection business provides a good example. Here, AMP shows return on equity around 30%. This is a level of profitability many investors would find more than acceptable.

Tower Australia is another player in life insurance. Its return metrics are somewhat lower than AMP’s, which is partly explained by its greater exposure to group, as opposed to retail, business. Although Tower would be unlikely to ever match AMP’s level of return, over time there is a good chance that they will be able to close the gap and forecasts have ROE approaching 16% over the next couple of years.

Peter Reed, April 2011