The AMP has given itself a big financial whack by taking on over half a billion in writedowns and other costs to clean up its messy life insurance business- especially its TPD and disability insurance. But shareholders won’t feel the impact of the losses because they are considered to be a one off, according to the board.
The insurer and wealth manager revealed Friday that the cost will total $565 million – and seeing it was a shock to investors, down went the shares by more than 6% to around $4.80 in late morning trading. At one stage the shares were down close to 8%.
AMP said losses in its life insurance business of $44 million in the third quarter of 2016 forced the company to review long-term trends in the sector.
The company said that the deteriorating environment had been caused by a "by a range of factors in a period of unprecedented external scrutiny".
"AMP has come to the view that the current trends are structural in nature," the company. In response it will "strengthen" the "best estimates" of insurance payout assumptions across its AMP Life business, which will result in "capitalised losses and other one off experience items" that will total around $500 million.
In addition, a fall in wealth protection profit margins will result in a hit to profit of $65 million.
As a result of the changes, the "embedded value" of the Australian wealth protection business will fall by $1 billion.
Goodwill attributable to AMP’s Australian wealth protection business will be "fully impaired" by $668 million.
"This reflects a decline in the potential recoverable amount for the Australian wealth protection business in line with reductions in embedded value."
AMP also announced a new reinsurance agreement with European giant Munich Re which will help release as much as $500 million in capital from AMP Life. That is a move to maintain its capital ratios at levels that will keep regulators happy. And the company said shareholders would be protected from any impact on dividend from the clean up
"Due to the one-off, and largely non-cash nature of these changes the AMP Board intends to exclude the impacts on current profit and to consider both the enhanced capital strength of the group and future earnings sustainability when determining the 2016 final dividend.
"AMP’s dividend policy remains unchanged – with a payout ratio range of 70% to 90% of underlying profit,” directors said yesterday.
