AMP moves to reduce risk in life book

  • By Elizabeth Fry

Wealth manager AMP has struck a series of reinsurance deals to reduce risk in its Life business while also reporting a 4 per cent rise in half year underlying profit to $533 million.

The wealth manager’s chief executive Craig Mellor said these deals will free up $500 million of capital from the insurance book, fuelling expectations of a share buy back.

All up, the new reinsurance program combined with the earlier deal with Munich Re, effectively means that 65 per cent of AMP’s retail life insurance portfolio will be reinsured for claims.

“The steps will both free capital and reduce earnings volatility,” Mellor said at a press briefing following the results.

The new reinsurance cover includes an arrangement with Berkshire Hathaway’s General Re for 60 per cent of the National Mutual Life Association retail book, and an extension of the Munich Re deal to 60 per cent (from 50 per cent) of the AMP Life book.

NMLA was merged with AMP Life earlier this year. AMP struck a deal last year with Munich Re to fix up a troubled life book business which had suffered a string of losses through escalating claims.

Wealth management compression

According to Citi’s Nigel Pittaway, the reinsurance deal is likely to be welcomed by investors although it is not a complete surprise and the earnings impact of any resulting buyback is likely to be offset by the consequent loss in earnings.

However, the reinsurance deal will cut profit margins by $5 million in the second half and by $30 million in 2018. Mellor is convinced that the shortfall would be made up by reinvesting the $500 million of released capital.

AMP’s much improved Life business booked a 10.6 per cent rise in earnings to $52 million.

Over the first half of the year, the AMP chief said the company had continued to drive growth in its banking operations, seen international growth in AMP Capital and had effectively managed margin compression in wealth management.

"This first half result is characterised by us delivering what we said we would,” said Mellor.

“Overall it’s a solid performance underpinned by strong cost management that steps us toward our strategy of transitioning to a higher-growth, capital-light business with a more internationally diverse revenue profile.”

Margin squeeze

Aside from fixing up Life, the market’s main focus was on the wealth management division, which Mellor called 'resilient' even as operating earnings slipped 1 per cent year-on-year to $193 million.

Net cashflows were significantly higher in the first half with stronger inflows from discretionary super contributions ahead of 1 July changes to non-concessional caps and as well as transitions of corporate mandates.

To offset the impact of margin squeeze, AMP is targeting additional revenue growth from its Advice and SMSF businesses. 

While the superannuation pull forward has boosted flows, Mellor has suggested second half cash flows will be subdued. For instance, second quarter net flows of $1.22 billion are far higher than the $373 million achieved for the year ago same quarter.

Operating earnings for the AMP Capital division were 11 per cent higher at $92 million, while AMP Bank recorded a stellar 10 per cent rise in earnings to $65 million driven by 17 per cent growth in lending to $18.8 billion.

“Net interest margins expanded 4 basis points on the immediately preceding half to 1.67 per cent with 10 per cent home loan book growth, though this is likely to slow in the second half,” noted Pittway.