Charge as insurance woes hit profit

AMP shares have tumbled by more than 10 per cent after it wrote down the vale of its life insurance business by $668 million and warned conditions in the industry had worsened further.

Investors sent AMP shares to $4.61 on Friday afternoon, a drop of 10.5 per cent, in response to a series of changes to shore up its troubled life insurance business.

The sell-off, which weighed on the sharemarket, took the wealth manager’s share price to its lowest level since early 2014.

It came after AMP said the challenges faced in wealth insurance over the past three years – higher-than- expected payouts and policies lapsing – had been “accentuated” in 2016.

After a detailed review, AMP formed the view that its problems were “structural,” or deep-seated, and it would write down the goodwill in its Australian life insurance business by $668 million this financial year.

“We’ve seen consistent deterioration in the insurance sector over the course of 2016,” AMP Chief Executive Officer Craig Meller said in the statement. “Today’s actions are designed to re-set the wealth protection business.”

The company also announced a reinsurance deal with one of the world’s largest reinsurers, Munich Re, to cover 50 per cent of $750 million of annual premium income as it seeks to “reduce the magnitude of earnings volatility” and release an estimated $500 million in capital.

The deal is expected to cut the unit’s annual profits by $25 million from fiscal 2017, AMP said in a statement Friday.

AMP is among insurers struggling in an industry facing rising claims, policy lapses and low investment returns. Insurers’ revenue fell 36 per cent to $28 billion in the year to June 30 from a year earlier, acording data from the Australian Prudential Regulation Authority.

AMP expects to book around $500 million in capital losses and one-off items and the wealth protection business’s embedded value will fall by $1 billion in the year to December 31, according to the statement. The division’s profit margins are expected to decline by about $65 million in the 2017 financial year, it said.

The impairment charges won’t impact AMP’s fiscal 2016 underlying profit, according to the statement. The company’s dividend policy of paying out 70 per cent to 90 per cent of underlying profits remains unchanged.

AMP’s tie-up with Munich Re “de-risks the company to some extent,” although the insurer’s future earnings remain a “black box” amid ongoing claims issues across the life industry, said David Walker, who helps oversee $600 million at Clime Asset Management in Sydney. “AMP’s share price has done nothing for nearly seven years,” said Walker, who doesn’t own the stock. “But the company’s still not cheap enough for us to invest in.”