Why AMP hit the pause button on buyback

  • By Elizabeth Fry

Wealth manager AMP risks disappointing shareholders for a second time after suspending the $500 million share buyback announced six months ago and returning just $200 million of proceeds from a reinsurance deal.

And, according to Citi’s Nigel Pittaway, it seems as if the $500 million of fresh capital - to be released from the string of new life reinsurance deals announced on Thursday - might suffer the same fate.

“Instead of this returning to shareholders, at least part of it seems destined to be spent on a range of growth initiative.in AMP Capital as well as in retaining and buying advice businesses,” he said.

AMP spruiked its original reinsurance deal with Germany's Munich Re last October as releasing close to $500 million of capital from AMP Life and suggested it would “consider a range of capital management alternatives including a return of surplus capital to shareholders".

“Yet, after just $200 million of buyback this has been ‘paused’ which muddies the capital return story,” argued Pittaway.

Pause button

For Pittaway, the question is why did management hit the pause button on the initial buyback? It could be that extra capital requirements in the first half caught the financial giant by surprise.

“With the current regulatory environment for bank capital being one of 'unquestionably strong', it seems as if AMP was motivated to increase its capital levels to be in more in line with its peer group," he said.

The analyst is not at all critical of the new reinsurance arrangements with Berkshire Hathaway's General Reinsurance Life Australia as they significantly reduce risk in a business that has caused the financial services giant some difficulty.

The new cover - combined with an extension of the Munich Re cover - takes AMP to a position where effectively 65 per cent of its retail life book has been reinsured, the company said on Thursday as it reported an underlying profit of $533 million for the 2017 first half.

Also, on Thursday the wealth manager’s chief executive, Craig Mellor, said actions undertaken to stabilise and reset its insurance business had delivered an 11 per cent boost in earnings.

Analyst skeptical

Nevertheless, in Pittaway’s opinion, while Mellor may simply be retaining flexibility and conservatism on capital, the stance raises acquisition and execution risk.

“Over its history as a listed entity, AMP does not have a great track record of deploying capital for returns and, in our view, the market is therefore likely to remain skeptical it will do any better this time around," he said.

“We still believe the AMP story lacks impetus despite progress with derisking the wealth protection business and evidence that its plans to offset wealth management margin pressure with advice profits are starting to gain some traction.

“With the buyback suspended and $30 million of profits disappearing as a result of the new reinsurance deal there is pressure on earnings-per-share. This signs that the company’s wealth management strategy is working and strong earnings in AMP Capital and the Bank.”

That said, he added, AMP’s strategy to acquire orphan books of business seems to have the potential to yield strong returns.

Indeed, he went on to say, AMP's strategy of offsetting platform margin compression with revenue from advice and SMSF seems to have started well with it already guiding to achieving its targeted incremental revenue equivalent to 2 per cent of Assets Under Management in 2018.

Pittaway has forecast a full year underlying profit of $1.05 billion for  2017 rising to just $1.07 billion for 2018.