The AMP’s second earnings warning so far in 2013 on Friday has revealed that the deal two years ago to buy the local operation of AXA, has helped destroy over $1.5 billion in value, with more at stake.
Back in 2011, the AMP won a tough takeover battle for AXA Asia Pacific for more than $14 billion, of which around half the amount was paid for by Axa’s French parent which bought the Asian business.
AMP bought the Australian operations for an effective $7.2 billion at a price of $6.43 in shares and cash.
On Friday AMP shares closed at $4.80, down $1.63, or just over 25% lower than the price set in the AXA purchase.
And that share price fall has come despite a 30% plus rise in the stockmarket in the same time, which has helped the AMP in some areas, especially since midway through 2012.
But the problems are not just being seen at the AMP. Media and industry reports say that Macquarie Group, the Commonwealth bank and the National Australia Bank has seen sharp rises in policy lapses over the past four years, with the lapse rates worsening in the past year or so.
And big US reinsurer, Reinsurance Group America said it lost $300 million in the Australian insurance market in the June quarter and has suspended new business in the group total and permanent disability market (sold to companies) indefinitely, according to reports in the AFR at the weekend.
Market reports suggest the AMP’s problems are worse in its National Mutual Life income protection unit that came with the AXA purchase.
But all the talk of rapid integration, synergy benefits and now a $200 million cost cutting campaign over the next year or so, the AXA deal has been a disaster for the AMP because of just one area of business alone – the wealth protection operation where, by the end of 2013, annual earnings of close on $200 million could have been wiped out.
The AXA takeover saw AMP move deeper into a lot of areas of business in Australia – wealth management was one, and the most important, but so was wealth protection which in many ways is an add on for wealth management products.
But the thinking behind that strategy has collapsed.
Friday’s earnings warning, like the one in June, was all based on worsening conditions and rising lapsed rates in this business.
AMP YTD – AMP shares down on AXA, insurance problems
AMP said that it expects earnings to take a hit of up to $65 million in the final quarter of 2013 due to the poor performance of its wealth protection business.
There was a $24 million hit in the third quarter, while the June 30 half year report showed a huge plunge in earnings to just $62 million, from $134 million in the first half of 2012.
The problems seem to have appeared in the second half of last year as employment started softening and policy holders started turning in their policies or allowing them to lapse.
Full year earnings growth in wealth protection slowed sharply – the AMP only earned $56 million in the six months to December, 2012, against that $134 million for the first half.
Now there’s further losses projected for the three months to December 31. Based on the figures reported on Friday, the AMP could see earnings fall by $90 million or more, which would imply a loss for the current half year.
All up this year (compared to 2012) will see a dramatic plunge from profits to either break even or worse by the end of the year, judging by the comments in Friday’s update.
The number of policy lapses – people cancelling or not renewing their insurance policies – continued to worsen in the three months to the end of September, AMP said on Friday.
It now estimates that earnings will take a hit of between $50 million and $65 million during the final three months of calendar 2013. The company forecast $24 million of losses in the company’s wealth protection business – which provides life and income insurance – during the September quarter.
The company pointed out that there was a chance the 4th quarter’s actual results could be worse than the estimates. Employment continues to remain under pressure with a number of major job losses reported in recent weeks.
The AMP says it has now bought "forward its year-end review of experience for those product areas that have the potential to impact the FY 13 operating results. While this review is yet to be completed, AMP expects to revise its incurred but not reported reserves (IBNR) for the group insurance business and its best estimate lapse assumptions for the NMLA income protection book, which will impact both the Q4 and the FY13 operating results."
And the AMP hinted that the move could impact the company’s final dividend.
"The AMP Board will make its decision on the dividend for the second half of 2013 in February 2014, based on the conditions prevalent at that time. The Board will have regard to AMP’s capital position and its dividend payout policy of 70 – 80 per cent of full year underlying profits.
"In doing so, the Board will give consideration to the fact that the expected capitalised loss ($40-$50 million) is a non-cash item and would not reduce AMP’s overall capital position, given Deferred Acquisition Costs are deducted from AMP’s capital base to determine regulatory capital."
The AMP though has form in cutting dividends to fit the financial circumstances. The board trimmed this year’s interim dividend by one cent a share to 11.5c in August.
The AMP paid a final for 2012 of 12.5c a share, making a full year payout of 25c. That’s not going to be repeated this year with the one cent a share cut mid-year, and it certainly looks like there will be another cut of at least one cent a share for the current half.
But until the damage from wealth protection is certain, shareholders should expect the worst until the wealth protection business is stabilised and risk priced at a proper level.
