AMP shares lost more than $2.3 billion in value yesterday after investors abandoned the company in the wake of news that it was to split itself up, selling off its troubled insurance business, and separating and then floating the company’s remaining New Zealand operations in 2019.
The complicated deal – which was made hard to understand by its convoluted nature – saw the shares plunge by more than 24% at one stage to an all-time low of $2.46. They closed at $2.50, a record low close for the company and a loss of 24.7% on the day.
The drop in the company’s shares went on all day as investors sold rather than stay invested in a company whose future is becoming problematic. Adding to the problems for AMP was its quarterly funds flow update which showed a large outflow in the September quarter from some parts of the business.
At the close of trading yesterday the company’s value was just over $7.4 billion – less than half the value at the start of the year (the shares are now down more than 51% year to date). the value on Wednesday at the close was $9.73 billion
That is just $400 million or so more than the company’s net equity at June 30 to $7.053 billion. That narrow gap will be worrying key regulators like APRA, ASIC and the Reserve Bank because the AMP is a systemically important financial group with a small but profitable bank, the life insurance business that is being sold off, and a large and profitable funds management and advisory business.
While many will see the AMP’s announcement of the sale of its life insurance arm and the quitting of its NZ operations as a reaction to the banking royal commission revelations about poor practice and the lotting of customers by AMP advisers and the company itself, the problems go back further – five years or so to the problems in the wealth protection and life insurance operations which have caused the company no end of financial grief and losses.
Life insurance in Australia has suffered from poor performance in recent years, prompting all of the major banks except Westpac to sell their life insurance businesses. It had been rumored that the AMP may join the exodus. That is now confirmed, sort of.
For the AMP this is a big deal because for 169 years the business was founded on life insurance, especially whole of life policies and some early retirement plans and funds management.
That will now be gone – if the company survives this terrifying slide in its share price – by midway through 2019.
But it will not get $3.3 billion in cash – which is what many investors are now upset about.
The deal will see AMP get $1.9 billion in cash, plus $300 million in preference shares in AMP Life. Another $1.1 billion in what was called ’non-cash consideration’ will not be received by AMP.
This will effectively be money left with Resolution Life. In effect AMP shareholders now become an investor in Resolution Life, which is also upsetting investors.
The statement said this would be “Economic interest in future earnings from the mature business, equivalent to A$600 million; expected to provide steady ongoing earnings to AMP of approximately A$50 million after tax per annum, assuming an annual run-off at 5 percent. A$515 million interest in Resolution Life, focused on the acquisition and management of in-force life insurance books globally.”
AMP said it “expects to monetise all non-cash consideration over time” but no time frame was given. That $A515 million will give it about 20% of Resolution Life – which was not really spelt out in yesterday’s announcement.
With that imprecision, it’s no wonder the sell-off in AMP shares was much greater than the market’s wider slump yesterday. In reality, by leaving $1.1 billion with the buyer, AMP will only net $800 million, which is a long, long way from the headline $3.3 billion.
There’s also doubt about the dividend which the company said would be at the lower end of its range of 70% to 90% of earnings.
“AMP continues to target a total FY 18 dividend payout within, but towards the lower end of its dividend guidance range of between 70 – 90 percent of underlying profit,” the company said yesterday. It gave a record date next February for the payment of the dividend, but no mention of a figure.
AMP paid a 10 cents a share interim this year (down from 14.5 cents a year earlier) and paid a 14.5 cents a share final for 2017 (up from 14 cents a share previously).
The company said the significant capital release will strengthen AMP’s balance sheet and will mean a switch in focus to the higher growth businesses of Australian wealth management, AMP Capital and AMP Bank.
It also has an agreement with Swiss Re Life & Health Australia Ltd to reinsure New Zealand retail wealth protection, releasing additional capital of up to $A150 million. Swiss Re and Berkshire Hathaway’s reinsurance arm already have deals in place covering part of the Australian insurance business to be sold.
AMP also intends to divest its New Zealand wealth management and advice businesses via an IPO next year.
In July AMP launched a program to repair its reputation and “earn back trust”, by compensating customers for lost earnings, strengthening risk management systems and controls, and cutting fees on its superannuation products.
This was forced on it by a string of adverse disclosures by the company and the royal commission earlier in the year that saw the then CEO, then chair and several board members depart the company.
In August the company reported a 74% fall in half-year profit to $115 million, driven down by provisions to compensate customers for financial advice they paid for but didn’t receive.
Mike Wilkins, AMP’s Acting CEO, said yesterday the completion of a portfolio review marks a major step forward in reshaping AMP as a simpler, more focused group.
“Delivering the right outcome for customers, shareholders and employees has been our focus throughout the portfolio review,” he said in a statement.
“For customers, there will be no change to their existing insurance policy terms or conditions. They will benefit from Resolution Life’s deep expertise in managing in-force insurance policies and its commitment to customer service.
“For shareholders, the agreement with Resolution Life and our exit from wealth protection and mature delivers important strategic benefits. It substantially simplifies our portfolio, delivers certainty and frees up capital.”
AMP said the simplification and separation costs related to the Resolution Life sale transaction are expected to be in the order of $A320 million post-tax. Additional capital from the transaction with Resolution Life will facilitate a reduction in AMP’s corporate debt of up to $A800 million.
The company will exclude the second half earnings from the discontinued businesses in determining the final dividend.
Investors were not listening to the company yesterday. A briefing didn’t help assuage concerns and the shares plunged after that briefing was finished.
