AMP investors focus on the dark side of its quarterly update

AMP shares have dived as investors focus on insurance-related writedowns rather than a positive new re-insurance deal.

AMP CEO Craig Meller at AMP’s Sydney offices. (Hollie Adams/The Australian)

A combination of concern over planned government changes to superannuation and a massive increase in wealth protection claims has resulted in a profit warning from AMP which sent its stock price spiralling down to a 30-month low of $4.85 a share.

The bad news came on a day in which AMP also unveiled a new re-insurance deal with Munich Re which will free up some $500 million in capital and allow capital to be returned to shareholders.

The market ignored this good news and instead focused its attention on the structural problems in the insurance industry which have led to an increase in claims.

AMP’s woes are compounded by the fact that its biggest competitors, Dai-ichi and AIG, are able to provide lower priced cover because of their lower cost of capital.

The re-insurance deal is part of AMP’s response to this situation but the real problem is a structural change in the income protection market, which has resulted in a massive increase in claims.

Changes to workers compensation arrangements have led to people lodging more claims with private operators outside their employment and the increased focus on the market has resulted in dramatically increased claims.

AMP was trumpeting the fact it was getting people back to work faster as the best way to help them through their issues but it seems they haven’t been working fast enough.

Last quarter it suffered its first net outflow of funds for four years as a direct consequence of the budget changes to superannuation.

AMP suffered a net outflow of $327m compared to a net inflow of $241m in the same quarter a year ago.

AMP boss Craig Meller is hoping the changes made since the budget will clear the confusion and result in a return to positive flows.

The profit warning comes because of reduced profit margins as the company adjusts for the increase in claims.

Insurance accounting requires all the losses from a 10-year policy to be recorded in year one, which explains the $500m in capitalised losses.

This has also forced a $668m write down of goodwill on the AXA acquisitions some six years ago.

In the first six months this year, there was a $42m hit to insurance margins in the income protection division and this followed by a $44m blow in the fourth quarter.

This also suggests profit in the division will halve from $180m a year ago.

AMP’s Meller has told the market he is working to address the issues but, despite of the good news on the re-insurance deal, the industry’s structural problems have spooked the market.