AMP recently advised the market that the sale of its AMP Life business, including both the Australian and New Zealand wealth protection and mature businesses, to Resolution Life was now highly unlikely to proceed on current terms. This was due mainly to challenges from the Reserve Bank of New Zealand, which sought the onshoring of assets for Resolution Life, and this is not consistent with AMP’s current branch structure arrangements. As a result, the wealth manager has scrapped its first-half CY19 dividend.
AMP was disappointed with the decision as it affects its new strategy, and management indicated it was working with Resolution Life to determine if there was a solution that addressed policyholder interests, regulatory requirements and certainty of execution. However, it flagged this would require the negotiation of new terms, which might be less favourable, and that if a revised transaction could not be achieved on acceptable terms it would retain the life business.
Ord Minnett believes the original deal was poor value for AMP shareholders, even now taking into account expected legislative changes related to ‘protecting your super’ and claims deterioration. So, prima facie, a wind-back of the life sale may be a positive for shareholders and EPS, even though AMP has undertaken some costs to split the company. It would, however, leave the company strategically confused, capital-constrained (which would be partially addressed through dividend cuts) and in need of investment.
We have made minor changes to our earnings estimates to assume only $100m in separation costs in the first half and no dividend in CY19. We maintain our Hold recommendation due to ongoing risks in the stock, which relate mainly to the potential for class actions and finance industry reforms, and we have trimmed our target price to $2.10 from $2.17.