AMP life insurance woes to dent profit

AMP will “reset” its wealth protection business with a $668m writedown, as it warned of a $565m hit to earnings.

AMP CEO Craig Meller. Pic: Hollie Adams

Financial services giant AMP has been forced to “reset” its wealth protection business, resulting in a $668 million writedown as it admitted a decline in the life insurance sector was not merely a cyclical headwind.

More than $500m will be wiped from profits on top of the writedown, with the news slashing AMP’s valuation by as much as 10 per cent in early trade.

The group (AMP) also warned the debate about superannuation reforms that ultimately ended with a well-received backflip from the Turnbull government had weighed on confidence in the sector.

In a third quarter update on its operations, AMP said the struggles in its wealth protection business that have plagued it for three years had been exacerbated this year as the life insurance industry lost momentum amid “unprecedented external scrutiny”.

“This trend has continued into Q3 2016 resulting in an experience loss of $44 million,” the group said.

“Having reviewed experience against long-term trends, AMP has come to the view that the current trends are structural in nature. In response, AMP expects to strengthen best estimate assumptions across both AMP Life and NMLA from year end.”

The actions will result in a $500 million charge against FY2016 underlying profit due to capitalised losses and “other one-off experience items”, while wealth protection margin cuts will trim profit $65m in FY2017.

The company said the changes would force the “embedded value” of the division at the end of FY2016 down by around $1 billion.

AMP said it would also write down the value of goodwill tied to the wealth protection operations.

“Goodwill attributable to the Australian wealth protection business is expected to be fully impaired by $668 million when preparing the 2016 year-end financial statements,” the financial services company said.

“This reflects a decline in the potential recoverable amount for the Australian wealth protection business in line with reductions in embedded value.”

The impairment will not impact underlying profit and will likely not be factored into its dividend calculations.

AMP chief executive Craig Meller said the actions were necessary given the lack of any sign of a turnaround.

“We’ve seen consistent deterioration in the insurance sector over the course of 2016 and, despite the progress on claims transformation to date, it has significantly impacted the performance of our wealth protection business,” he said.

“Today’s actions are designed to reset the wealth protection business. They will improve the group’s earnings stability, free-up capital and help bring into focus the growth potential of AMP.”

Mr Meller added cashflows in the third quarter were weak amid worries around superannuation reform, with its wealth management arm logging net cash outflows of $327 million for the quarter.

This compared to net cashflows of $241 million in the corresponding quarter last year.

AMP’s total assets under management did, however, rise 3 per cent to $118.1 billion, aided by strength in investment markets through the quarter.

“While cash flows remained subdued during the third quarter, they were impacted by the ongoing uncertainty in superannuation legislation leading to lower consumer confidence in the system, advisers adjusting to the enhanced regulatory environment and recent investment market volatility,” Mr Meller said.

“However AMP is optimistic that the recent superannuation reforms will reverse this trend.”

The company also detailed a reinsurance deal with Munich Re to reinsure 50 per cent of $750m of annual premium income of the AMP Life retail portfolio from November 1.

The deal, if accepted by regulators, has the potential to release up to $500 million of capital from AMP Life.

“This initial tranche of reinsurance will reduce the magnitude of earnings volatility from the Australian wealth protection business for the AMP group,” the company said.

At 10.15am (AEDT), AMP shares slumped 6.8 per cent to $4.80, against a broader market rise of 0.1 per cent.