Is AMP likely to sell-off its troubled life insurance business?
While much of the AMP's (ASX: AMP) recent 5.3% share price fall to $5.51 was in direct response to a disappointing quarterly update – including an almost 40% decline in cash flows across the important wealth management division and a worse-than-predicted decline in the life insurance business – a further selloff to $5.43 can be attributed to some pretty ordinary handling of the decision by chairman Simon McKeon to unexpectedly jump ship.
Neither McKeon nor AMP CEO Craig Meller has commented on his departure, but it's understood that the decision was the result of his pending appointment as chancellor of Monash University in October.
A change of chairman typically wouldn't alarm analysts, but the uncertainty around McKeon's resignation, only weeks after being reappointed – plus a reported $18 million spike in claims losses from the wealth protection division (the life insurance business) – has caused analysts to downgrade AMP from a buy to a neutral recommendation, with price targets down from $6.30 to $5.50.
What's fuelling analyst concerns is the absence of any meaningful losses from major bank competitors in recent weeks, which could suggest that higher incidence levels could be an AMP-specific problem.
Most of the claims losses came from retail income protection across incidence and termination.
Meantime, the overall poor result was blamed on shaky investor confidence as markets enjoyed a shocking start to 2016, dominated by worries over global deflation, China, rising US interest rates and commodity price falls.
Despite reassurance from Meller that there's nothing to indicate a needed change in long term assumptions about claims ratios in this part of the business – having recently reviewed the process – a neutral recommendation looks unlikely to change until AMP can illustrate greater stability within wealth protection, its most troubled division.
Net cash flows in the Australian wealth management division fell to $209 million from $342 million in the prior corresponding period, while weaker investor confidence, ongoing market volatility and advisers adjusting to an enhanced regulatory environment, were cited as contributory factors to the cash flow slump.
Due to negative investment market movements, total assets under management (AUM) also declined by 2% to $112.6 billion on the prior quarter.
Meantime, contrary to initial speculation, numerous controversial changes to the superannuation rules – including $1.6 million cap on super balances that can be transferred to private pension accounts, new limits on contributions, and tighter restrictions on access to transition to retirement pensions – are expected to be a net-benefit for AMP, with added complexity driving the need for more not less financial advice.
Given the underlying problems for AMP's insurance business, there's growing speculation that it might decide to follow National Australia Bank Ltd (ASX: NAB) and Macquarie Group Ltd (ASX: MQG) and exit life insurance to focus on asset management and other financial services businesses.
Its cold comfort, but AMP's decision to acquire AXA Asia Pacific five years ago – at the wrong time in the cycle – does appear to have been a horrendous strategic mistake.
Deep-seated issues within its insurance division and issues at the board level will put AMP under scrutiny of industry funds, plus bank-owned wealth companies.
While the stock is trading well below its last high of $6.77 24 April 2015, it's probably for good reason. Those contemplating a buy in at current levels may be rewarded for waiting on greater clarity on the new chairman, and plans to address problems within its life insurance business.
The higher risks for AMP share price hinted at within the five months technical chart setup could create opportunities for those with an appetite for shorting the stock.