After banks, insurers the next on RBA hit list. Buried in the Reserve Bank’s Financial Stability Review was a small warning to insurers and their investors. It wasn’t as direct as the one to banks to not go off looking for high-risk, high-return profits to boost falling returns on capital. It was one of those “we see a potential problem … and we’re watching” type of warnings, which regulators love to make from time to time. A shot across the bows:
“Profitability of the general insurance industry declined in 2015, reflecting lower investment income and a deterioration in underwriting results as insurers faced strong competition for commercial lines of business. While these pressures appear to have subsided somewhat through the year, there is little sign of an imminent rebound in profits. Lenders mortgage insurers’ (LMIs) profitability has also been reduced as some banks switched to offshore insurers and the volume of high loan-to-valuation (LVR) loans declined in response to tighter lending standards. Given these developments, insurers’ pricing policies and the adequacy of their claims reserves warrant ongoing attention. “
Hmmm, “warrant ongoing attention” is a phrase that raises a lot of questions (such as, attention by whom? APRA, the RBA, shareholders, ASIC?). The direct mention of “the adequacy of their claims reserves” reminds us of the usual way insurers “smooth” their results via releases from these reserves when they feel they have over-provided in the past for future risks. Equally, the mention of “ insurers’ pricing policies” reminds us that the RBA (and no doubt APRA) feels some insurers have not been setting the right level of premiums for some of their insurance products; the income protection business comes to mind, some forms of motor vehicle and property insurance, and perhaps workers compensation.
And while the life insurance business is recovering from the misselling of income protection products, it still has a way to go in repairing weaknesses, according to the RBA.
“These include poor definitions of product benefits, pricing not being adjusted for enhanced benefits, a lack of data on insurance risk and a shortage of skills for claims management. Nonetheless, the effect of previously weak underwriting practices is likely to weigh on insurers’ profitability for a while yet.”
— Glenn Dyer
Price dives: buy, buy, buy! J.P. Morgan, a co-adviser to the McGrath real estate float/flop, has cut its target price for the stock yet maintained its “overweight” recommendation. In a note to clients, the broker cut its share price outlook to $1.60, down from the $2.10 float valuation, based on McGrath’s earnings downgrade for 2016 on Monday. McGrath shares are below the $1 mark. In other words, buy, buy, buy! And thanks to The Australian Financial Review for a nice list of other IPO flops that McGrath has joined, along with Dick Smith, McAleese, and Slater and Gordon. There’s Vocation, the now collapsed private education operator (which, at its peak, was worth more than $700 million, which was blown up when it collapsed and the shares were at 12 cents. It floated with a price of $1.89). Nine Entertainment is still with us (not withstanding the 60 Minutes Beirut debacle) … it floated at $2.05 and closed yesterday at $1.16. Ashley Services, a recruitment, hire and employment company, floated at $1.66, it closed at 20 cents yesterday (a McGrath-like performance). — Glenn Dyer
Wrong, Leigh. In her opening to Sabra Lane’s report on the day’s politics on 7.30 last night, host Leigh Sales described the Australian Securities and Investments Commission (ASIC) as “the banking regulator”. It is nothing of the sort, it is the corporate regulator, especially of the sharemarket. APRA and the Reserve Bank are the key banking regulators. So, despite what Treasurer Scott Morrison and PM Malcolm Turnbull might invent, ASIC is not the main regulator of banks and financial groups. ASIC monitors the banks sharemarket and disclosure performance, with the ASX in tow. It is also supposed to oversee financial products (but failed to do its job in the case of financial advice from the Commonwealth Bank). ASIC cannot look at the way the banks are lending and order them to change their practices to remain within prudential rules — that is APRA’s job, and the RBA’s — as they did last year. It is instructive to remember who kicked off this debate about bank culture — RBA governor Glenn Stevens in 2014-15, and APRA head Wayne Byers, not ASIC and its head, Greg Medcraft. In fact, on the Commonwealth Bank’s financial advice rorting, ASIC chose not to look at all. — Glenn Dyer