AMP Limited
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 31 October 2016, 11:08 AM
- Sectors Covered:
- Insurance, Diversified Financials
Disappointing quarterly update
AMP's 3Q16 update saw a further deterioration in the Contemporary Wealth Protection (CWP) business with A$44m in experience losses recorded (Morgans est: A$21m). Management has subsequently announced further actions to significantly re-set this business. Primarily, best estimate assumptions will be tightened resulting in a 2H16 capitalised loss of A$500m and a A$65m reduction in FY17 CWP planned margins.
In addition, AMP has announced a reinsurance agreement with Munich Re to reinsure 50% of A$750m in AMP life premium income. This will release ~$500m of capital, but further reduces CWP's planned margins by 25m in FY17.
Financial impact – negative high single digit EPS impact in FY17
We now forecast AMP to make a reported loss of ~A$750m in 2H16, with the goodwill write-down taken below the line. At the underlying profit level, we downgrade AMP's EPS forecast by ~54% in FY16 and ~9% in FY17.
Positively, we estimate AMP's excess capital position at FY17 will be ~A$2.25bn, post the 2H17 dividend and assuming Part 9 life consolidation is achieved.
Is this the final re-set?
It's impossible to completely rule out a further leg down in the life insurance market, although today's announcement appears a significant re-set by AMP. We understand revised CWP best estimate assumptions now fully reflect current difficult market conditions and factor in no market improvement. On our estimates, CWP's contribution to group operating earnings falls to just 9% in FY17 versus 17% in FY15, highlighting its reduced relevance.
Investment view
We were disappointed with the company update last week. However, we feel these management actions should finally remove the CWP division from the forefront of the AMP investment story and allow the market to focus on its more important wealth management franchises. AMP is trading on ~13x FY17F underlying PE and offers a ~6% dividend yield. We also believe the company, post its life reinsurance transaction, will have excess capital to potentially deliver a A10cps special dividend. AMP also retains strong leverage to a macro recovery.
We maintain our Add recommendation.
More information
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