AMP’s net profit increased 2.3% to $704 million in the year to December 31, thanks to strong earnings growth in wealth management and disciplined cost control.

But the result was partially offset by a poor performance in risk insurance, the group says.

AMP Financial Services saw the value of risk new business fall to $203 million from $215 million in 2011.

AMP Wealth Protection suffered poor lapse rates and claims experience, contributing to a 47.7% drop in operating earnings to $56 million in the second half.

Lapse losses were $29 million for the year and claims losses were $15 million. Annual premium income rose 6%.

The result reflects the challenging economic environment, with industry lapse rates at their highest in a decade, AMP says.

The group has strengthened assumptions on lapses and income protection claims for this year.

Remedial actions include product redesign, targeted pricing reviews, increased investment in retention programs, early claims intervention and faster claims settlement.

AMP says its adviser network has a key role. “The most important thing is making sure planners carry out annual reviews and remind clients why they took out insurance,” Financial Services MD Craig Meller said.

If clients see life insurance as too expensive, planners should discuss affordable or lower levels of cover to stop people “just switching off”, he says.

AMP’s cost-to-income ratio for the year was 47.3%. In the second half it was 48.4%, down 2.2 percentage points on the previous corresponding period.

Wealth Management saw second-half operating earnings rise 21% on disciplined cost control and a 2011 merger with Axa.

Since the merger planner and adviser numbers have continued to grow strongly in Australia, rising by 209 to 3636, AMP says.

The merger is on course to be finalised by June next year, six months ahead of schedule.

AMP’s mature business, the largest closed life business in Australia, increased operating earnings by 18% to $91 million in the second half.

The business is expected to run off 4-6% per year but this can vary in volatile investment markets.

AMP holds $2.4 billion of capital above minimum regulatory requirements.

It says it expects the Australian business environment to remain challenging this year but it welcomes improving investor sentiment.