Life's a Sinking Ship That AMP Is Right to Ditch
(Bloomberg Opinion) -- Here’s one foreign takeover that Australia doesn’t seem too worried about: The near-complete buyout of its life insurance industry.
With AMP Ltd.’s sale of its local and New Zealand life businesses for A$3.3 billion ($2.3 billion), the share of the premium pool going to local businesses will have dropped to little more than 10 percent from more than 50 percent in just a few years. The only major operators left in Australian hands will be owned by Westpac Banking Corp., annuities specialist Challenger Ltd., and Suncorp Group Ltd., following a wave of sales by three of the country’s big four banks.
As we’ve argued before, there are sound reasons for that retreat. Australia’s life insurers are sitting on a ticking time bomb: Their disability businesses have seen expenses rise as a result of increasing mental health-related payouts, even as premiums have stagnated because of underpriced policies amid a fight for market share by fee-hungry distribution arms. Letting foreigners crew that particular sinking ship seems a smart move.
Still, it hasn’t escaped the notice of buyers that local players are desperate to sell, and prices have moved accordingly. AMP’s life unit is being handed over at 0.82 times its embedded value, a measure that’s meant to encapsulate net assets plus adjustments for the discounted value of future earnings and regulatory capital.
Calculations of embedded value are more art than science – the figures for life insurers are all over the place and, to take one example, Prudential Plc is at about the same 0.8 times multiple despite there not being a single sell rating on the stock. Still, in general it’s not a great look to be selling assets off for less than your accounts say they’re worth.
That’s particularly the case when a large part of the ticket price comes in somewhat exotic forms. Of the total, A$1.9 billion is a cash payment from the buyer, Resolution Life Group – a closely held U.K. company that’s built itself up over the years as a sort of retirement home for underperforming legacy life insurance assets. Another A$515 million is an interest in Resolution Life itself, which seems conventional enough – but then there’s A$300 million in preference shares that AMP will be issued in the business it’s selling, plus a A$600 million sum that’s meant to represent the value of AMP’s share of future earnings. Given the way this industry has turned of late, we won’t know for years whether that final figure will ever be achieved.
Benchmarking the value of that particular dog’s breakfast – especially using the rather scanty numbers issued by AMP in its nine-page presentation – is no easy matter. Shareholders clearly weren’t happy, sending the stock down as much as 20 percent to a record-low A$2.655, its biggest one-day fall in 15 years.
AMP has had its share of self-inflicted wounds in recent years, with four of the nine-person board quitting (including former Chairman Catherine Brenner and CEO Craig Meller) in the wake of the Royal Commission inquiry into misconduct in the financial industry.
This transaction, though, doesn’t look such a mortal injury as the market is suggesting. AMP’s first job must be to staunch the bleeding from its negative-returning life insurance businesses in any way it can. Even at a knockdown valuation, this deal achieves that.
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David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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