The continuing problems in its wealth protection business has seen AMP Limited (AMP) report a sharp fall in net underlying profit for the 12 months to the end of December, the company reported this morning to the ASX.
The AMP reported a net profit of $672 million for the year to 31 December 2013, compared with $689 million for 2012, but that is misleading as it disguises the $126 million slide in earnings from the wealth protection business, a problem that has adversely impacted AMP (and the rest of the local funds management and insurance industries) now for 18 months.
The best result to illustrate the impact the problem was AMP’s underlying profit of $849 million which was $101 million, or 10.6% under the 2013 figure of $950 million.
As a result, the AMP won’t be jointing the growing list of companies boosting payouts to shareholders for 2013. The company’s final dividend was left unchanged at 11.5c from the final for 2012 and the interim for 2013 – which was down a cent on 2012’s level.
Effectively, that means the 2013 dividend has been cut by a cent, but more importantly, the payout ratio is 80% of earnings – the top of the company’s preferred range of 70% to 80%.
That tells us the AMP’s board was desperate not to be forced to cut the final payout by being a little more ‘conservative; and keeping the payout to the bottom of the range.
The problem was the 66% (the $126 million) plunge in earnings from wealth protection – from $194 million to $64 million in 2013. The problem was made clear in the earnings downgrades from the company in June and then at the interim profit report’s release in August.
AMP 1Y – AMP’s wealth protection black hole hit profit, dividends in 2013 results
But the report this morning failed to illustrate the size of the financial hit AMP took from these problems.
The interim report revealed the company made $64 million from income protection in the six months to June 30, compared with $134 million in the first half of 2012. Seeing it said it made $64 million from wealth protection in the full year, it didn’t earn a razoo in the final six months of 2013, against earnings of $56 million in the last half of 2012.
Offsetting this huge losses, and especially the weak second half performance was "strong growth in Wealth Management, AMP Bank, Mature and New Zealand," according to the company. Higher returns from these businesses helped offset some of those losses in wealth protection.
Another problem for the company, besides "the challenging life insurance environment," was low interest rates and returns which cut investment income on shareholder funds over the year (a downside of record low interest rates and in major economies offshore, such as the UK and US).
AMP said it "remains strongly capitalised with capital resources of A$2.1 billion above minimum regulatory requirements at 31 December 2013, up from A$1.7 billion at 30 June 2013". That reflected retained profits and A$325 million raised through the AMP Notes 2 retail subordinated debt issue. "Subject to APRA approval, it is intended that the 2009 issued AMP Notes of A$266 million be redeemed for cash in May 2014," directors said.
Newish AMP Chief Executive, Craig Meller alluded to the problems in wealth management in comments in this morning’s statement.
He said that while AMP has delivered strong underlying earnings growth across the majority of its business units; "the result has clearly been impacted by the ongoing challenges facing the life insurance sector."
"Excluding Wealth Protection, AMP achieved an average 15 per cent earnings growth across the company compared with FY 12. This reflects particularly strong sales momentum in Wealth Management, improved net interest margin in AMP Bank, improved investment returns in the closed Mature business and strong cost management across the group.
"Wealth Management, AMP’s largest business unit, delivered an increase in operating earnings of 16 per cent, reflecting stronger net cashflows and improved investment markets leading to 14 per cent growth in average assets under management (AUM). Margins in the wealth management business declined 4 basis points to 121 basis points which is within AMP’s market guidance," he said.
The AMP repeated its August 2013 promise to deliver A$200 million pre-tax recurring, run-rate cost savings by the end of 2016. AMP also expects to invest A$320 million (pre-tax) over the next three years to deliver these "efficiencies".
But that’s not the biggest problem for the company to resolve. Delivering those savings will take some of the attention away from the black hole in wealth protection, which is what ‘cost savings’ were supposed to do.
The problems in wealth protection are in income protection policies written to ‘protect’ clients against injury at work, loss of job, or an injury that prevents them working. These policies are written in the company’s life insurance division.
On top of that life insurance policy surrenders (including wealth protection) are rising because customers either can’t afford the policies, or have decided to surrender their life policies and take the money and invest it themselves. Many of these policies have also been written for members of self-managed super funds.
With unemployment continuing to rise, the problems won’t improve quickly.
AMP Directors summed up the problem in this morning’s report, saying (with something of an understatement): "The life insurance sector remains challenging with insurance claims and policy lapses remaining at higher levels than the long term average."
"AMP has undertaken a comprehensive review across all aspects of its life insurance business and researched global best practice, and as a result launched a series of initiatives that are expected to improve claims and lapse experience over the medium term."
In other words, the problem isn’t going to improve any time soon. It clearly is the one major task of newish CEO, Craig Meller (who replaced Craig Dunn in 2013) must tackle and clean up and stop the drain on the whole company. Cutting costs won’t mean anything if the huge losses in wealth protection can’t be staunched and then ended.
