Tale of two AMPs after horrible 2016

AMP’s first quarter update on Thursday will likely show its wealth franchise is not broken and its beleaguered life business has stabilised.

Weak flows and falling reported planner numbers raised questions about the resilience of AMP's wealth franchise as uncertainty in the tax treatment of super, the increasing regulatory burden and volatile markets contributed to AMP's disappointing 2016 second-half wealth net outflows of $250 million.

The financial services giant posted a 57 per cent drop in full year underlying earnings for 2016 to $486 million. For its part, the wealth management business saw earnings dip 2.2 per cent to $401 million.

However, AMP fortunes should improve, buoyed by stronger markets, regulatory and tax clarity, according to Morgan Stanley’s insurance analyst Daniel Toohey.

“AMP's new digital capabilities, goals-based advice model and focus on driving planner productivity adds further comfort,” he said.
 

Not fully convinced

Toohey is forecasting wealth net flows of $400 million for the first quarter, adding that second quarter numbers should be positive too given regulatory tailwinds.

This includes the transition to the revised $100,000 non-concessional contribution cap providing a one-off opportunity to invest up to $540,000 by 1 July and winning the Western Australia's Water Corporation Superannuation Plan mandate which will deliver inflows of $450 million.

However, the market is yet to be fully convinced AMP's Life issues are behind it after the business suffered a blow-out in claims and an increase in lapsed policies. The 2016 result was horrible with the life insurance division sustaining a $415 million loss.

This prompted AMP to de-risk its Life operation by signing a reinsurance deal with Munich Re for half the book and revise its earnings estimates so this year it could release $500 million in capital to shareholders.

“However, with AMP downgrading Life and seemingly aggressively rebasing planned assumptions alongside the Munich Re deal, the likelihood of any material adverse claims or lapse experience seems low,” said Toohey.
 

Logic and derring-do

"There’s a certain logic and derring-do about AMP’s effective withdrawal from the Life Insurance sector and it should, in the short-term, lead to an uplift in re-set earnings expectations," said CLSA’s Jan van der Schalk.

"Whilst the go-forward AMP, as a wealth manager, is clearly a business with many advantages, when we see the changes being implemented by, for instance, the likes of AIA in the Life market we can’t help but wonder at the opportunity cost of this strategy for AMP.

“Our belief that, long term, AMP’s tactical withdrawal from Life Insurance manufacturing is the wrong move is of little relevance today,” the analyst lamented. "Our job is to judge what the new version of AMP looks like going forward and, broadly, we’re inclined towards the positive. The dysfunction of the last year has taken attention away from all the good things about AMP; wrongly so.”

The analyst argued that AMP’s wealth management business dominates in every sector where it offers product. Further, despite the recent turmoil within the superannuation sector, it has managed to maintain its market share.

“Arguably this provides a sound base for management, now largely undistracted by issues in Life, to go and prove how good they really are," he said. “Let’s be brutally frank, it’s a super-hard task where success, ironically, will come in the form of maintaining share - growth would, almost, be a pleasant by-product.”

To his mind, the regulatory landscape - in respect of the mooted development of the superannuation system - appears tilted in favor of AMP.

“Hence, given the inevitable political uncertainty and complexity, backing the biggest player is hardly the work of a genius. This is potentially AMP’s to lose.”

AMP will update the market on growth opportunities at its Strategy Day on 25 May.

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