Major institution at risk of COVID profit hit

A major institution may be at risk of the same profit hits that have befallen the big four banks in the COVID-19 crisis if it is unable to offload its life insurance business, a new report suggests.

Analysts at Morningstar have tipped that AMP’s ability to remain above its capital requirements is highly dependent on the sale of AMP Life going through, as well as the wealth manager being able to keep a lid on advice remediation costs.

A new report from the research firm said that the sale of AMP Life to Resolution Life, which is due to complete on 30 June, could still be at risk as a result of COVID-19 induced market conditions.

“The sale could be derailed if the buyer, Resolution Life, walks, but with several key regulatory approvals granted, we think it’s likely to go ahead and our forecasts assume the sale proceeds as planned,” Morningstar said.

“Not selling AMP Life could be dilutive to our valuation as the business is capital intensive and also the least profitable within the group.”

The report said if the sale did not go ahead, AMP’s capital position still placed it comfortably above the minimum without having to echo the banks’ decision to raise further funds from shareholders – but only if the costs of its advice remediation program remained as forecast.

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“AMP’s balance sheet is reasonable and a discount equity raising is very unlikely if the AMP Life sale proceeds and remediation costs don’t increase as we expect,” the research firm stated.

“If AMP Life is not sold, AMP should still be able to cover the cost of its remediation and investment program, and have about $500 million in excess of [market risk requirements].

“But there’s some uncertainty. If the AMP Life sale breaks down and remediation costs spiked almost 50 per cent to $1 billion, we estimate AMP could still absorb these costs and execute its transformational investment, but capital would then fall very close to the regulatory minimum.”

However, Morningstar said it was more likely that in this scenario, management would slow down its business turnaround strategy or reduce dividends.

The research firm said AMP’s recent decision to pull back on the sale of its New Zealand wealth management business made sense given that the aim to offload both this business and AMP Life in the current market was “ambitious”.

“While offers were made for NZWM, prices were unsatisfactory,” the report said.

“It’s reasonable for management to wait for a better market to sell and for now we project NZWM to remain with AMP for our forecast period.”

Major institution at risk of COVID profit hit
AMP
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