AMP clearly bungled the communication strategy around the sale of its life insurance business but that is not a reason for it to bow to pressure from a handful of fund managers and reverse the $3.3 billion transaction.
Life insurance is no longer a low-risk business with predictable cash flows. It is increasingly high risk from a regulatory perspective. Also, it’s capital intensive and its earnings are volatile.
Consider what happened to AMP between June and September this year. In the six months to June AMP Life was hit with an experience loss of $28 million. That required AMP to tip in about $90 million in additional capital which, in turn, led to a $200 million reduction in the value of the business.
In response to the poor claims experience in the first half, AMP strengthened its best estimates assumptions. But in the September quarter the claims experience was a negative $22 million worse than expected.
These numbers show that despite years of poor performance and management attention, AMP continues to struggle to get on top of life insurance market developments, particularly in income protection and total and permanent disability.
One obvious advantage from the deal with Resolution Group was that AMP shed all the liabilities for its life insurance book from June 30 this year.
Much of the criticism of the sale of AMP Life sale revolves around the lack of value attributed to franking credits. But as AMP pointed out on Wednesday the franking credits are a function of the assumptions made about future business which underpin the so-called “embedded value”.
HomeSide deal nicknamed Homicide
Relying on the assumptions underpinning embedded values of life companies is fraught with danger. The truth of that can be found in the embedded value figures published when AMP bought the Australian life business of AXA Asia Pacific.
That deal could well go down as the worst financial services deal over the past 20 years with the exception of National Australia Bank’s $1.9 billion purchase of HomeSide in 1998. The business lost $3 billion and was later nicknamed Homicide.
AMP made two glaring mistakes last week. It failed to give enough detail about the deal with Resolution Group and it tried to be too cute by putting out a headline figure that included non-cash items that won’t become liquid until some time next year.
Nevertheless, AMP is smart to get out of life insurance now. The industry will only get tougher from here judging from the latest missives from the Australian Prudential Regulation Authority issued in response to accusations of poor supervision of the sector by the Hayne royal commission.
APRA is softening up the industry for a major crackdown on every aspect of the life business. AMP is wise to be free of that scrutiny even if it had to sell out at a discount.
Resolution Group has a distinct advantage over AMP. It can use international diversification of the ownership of life insurance books to lower the risk of owning AMP Life.
Key area of expertise
The benefits of international diversification were on show when Mitsubishi UFJ Trust and Banking Corporation bought Colonial First State Global Asset Management for $4.13 billion.
MUFJ is on record as having about $US9 billion to spend on international expansion. Acquiring CFSGAM will give it an additional $213 billion in funds under management.
CBA got a good price at 17.5 times CFSGAM’s pro-forma net profit of $236 million. The business is not without its problems. It suffered net outflows of $20 billion last year but most of that was low-margin business.
Its growth profile in its key area of expertise, Asian emerging markets, has been capped in recent years because of prudent measures to limit capacity in order to maintain performance. But the Japanese will be able to take CFSGAM’s undoubted expertise in infrastructure investment in Europe and replicate it back home.
The Japanese have shown a willingness to pay up for assets as part of their determination to execute long-term strategies. Sometimes it has backfired, such as with the purchase of Toll Holdings by Japan Post.
But mostly its institutions have done well expanding offshore in financial services. But the jury is still out on its purchase of a 15 per cent stake in AMP Capital in 2011 for $425 million.