EUR 850.00 For Business Accounts Only

Morningstar | Breakdown of Life Business Sale Adds to AMP’s Structural Headwinds, FVE Reduced

Our fair value estimate for narrow-moat AMP is cut to AUD 1.80 per share from AUD 2.05 on the likely breakdown of the sale of its life insurance businesses to Resolution Life. Included in the proposed sale are Australian wealth protection, Australian mature and New Zealand wealth protection, and mature businesses. The Reserve Bank of New Zealand, or RBNZ, won’t approve the sale unless assets held for the benefit of New Zealand policy holders are separated from other assets. AMP indicates the RBNZ's required changes will reduce returns for both AMP and Resolution Life making it “highly unlikely” to proceed on current terms.

There was considerable AMP shareholder backlash over the sale price of AUD 3.3 billion and the lack of transparency over the sale process. The lack of details on the actuarial assumptions the sale price was based on make it difficult to estimate a fair value, but at the time the sale price appeared too low. Nevertheless, the life businesses have continued to struggle. Per management, best estimate assumption changes over the life businesses since June 30, 2018, along with the impact of new superannuation legislation is guided to reduce a renegotiated sale price by about AUD 700 million, should the deal progress at all. We doubt the parties can negotiate new terms that satisfy stakeholders given a likely lower required sale price.

We also forecast no dividend in 2019, with management guiding to no interim dividend. Management expects to report level 3 eligible capital surplus above minimum regulatory capital requirements in excess of internal targets for the first half of 2019. However, the deterioration in the life business assumptions since June 30, 2018 and impact of new super legislation may be a precursor for a future increase in provisioning which may eat into the surplus. Along with the possibility for higher remediation cost than so far provisioned, this raises the potential of a future capital raising if the sale does not proceed.

Our model now assumes the life businesses sale will not complete. Our initial view is this will likely result in AMP generating lower free cash flows as the life businesses have higher capital requirements, despite generating higher group earnings. Under continuing ownership of the life businesses, AMP would not receive AUD 110 million per year in expected income from proposed equity investments in Resolution Life, preference shares and economic interests in the mature business that were part of the sale. Nonetheless, we expect this is likely to be more than offset by the earnings from the retained life businesses and not having to incur some of the costs associated with the life business sale. The costs include the circa AUD 80-90 million post-tax reduction in operating earnings of Australian Wealth Management, or AWM, due to an unwinding of internal distribution arrangements, aftertax separation costs of AUD 320 million, and stranded costs at the group level of AUD 40 million per year. However, it’s still early and AMP have not provided guidance on any of these items.

The uncertainty on the life business sale also adds to structural headwinds AMP is facing. We outlined some of the structural issues and how management may address them in our June 25, 2019 note “Accelerating Structural Headwinds Means AMP’s Long-term Prospects Too Uncertain to Invest In.” The sale of the life businesses forms an important part of the strategy to simplify AMP’s business model and make it less capital intensive. The sale would reduce the complexity associated with running life insurance businesses alongside financial advice, superannuation, platform, fund management, and banking businesses. It would also free more capital for investment in what management identified as its core businesses of AWM, AMP Capital, and AMP Bank.